<PAGE>
SKYLINE FUND
SPECIAL EQUITIES PORTFOLIO
ANNUAL REPORT
December 31, 1995
SKYLINE FUND
311 South Wacker Drive
Suite 4500
Chicago, IL 60606
800-458-5222
<PAGE>
2
<PAGE>
SKYLINE FUND SPECIAL EQUITIES PORTFOLIO
DEAR SHAREHOLDER:
Skyline Special Equities Portfolio showed a gain of 0.5% in the fourth quarter.
For the full year, the Portfolio showed an increase of 13.8%. At year-end, a
distribution of $1.00 per share was made to shareholders, comprised of $0.91 of
long-term capital gain and $0.09 of short-term capital gain. The net asset value
closed the year at $16.79 per share.
<TABLE>
<CAPTION>
PERFORMANCE SUMMARY(1)
SPECIAL EQUITIES RUSSELL 2000 S&P 500
-------------------------------------------------------------------
<S> <C> <C> <C>
4th Quarter 0.5% 2.2% 5.9%
1 Year 13.8% 28.4% 37.5%
5 Year 23.7% 21.0% 16.6%
Since Inception(2) 15.6% 10.0% 12.6%
</TABLE>
SHEET 1
<TABLE>
<CAPTION>
INITIAL
INVESTMENT 1987 1988 1989 1990 1991 1992 1993
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES $ 10,000 $ 8,314 $ 10,787 $ 13,377 $ 12,135 $ 17,885 $ 25,470 $ 31,289
RUSSELL 2000 $ 10,000 $ 7,567 $ 9,540 $ 10,985 $ 8,842 $ 12,913 $ 15,291 $ 18,181
S&P 500 $ 10,000 $ 8,795 $ 10,246 $ 13,468 $ 13,035 $ 17,016 $ 18,323 $ 20,155
</TABLE>
<TABLE>
<CAPTION>
1994 1995
------------------------
<S> <C> <C>
SPECIAL EQUITIES $ 30,929 $ 35,208
RUSSELL 2000 $ 17,851 $ 22,932
S&P 500 $ 20,421 $ 28,083
</TABLE>
NOTE: PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SEE "NOTES TO
PERFORMANCE" FOLLOWING THIS LETTER.
3
<PAGE>
While it would be nice in most years to make nearly 14%, it feels very
disappointing in 1995 because so many areas of the stock market showed much
higher returns during this period. It was a period when large company stocks
performed better than small company stocks and growth stocks performed better
than value stocks. Since we focus on small company value-oriented stocks, we
were investing in the area that showed the least dynamic return in 1995. Though
the year was a disappointment, the Portfolios long-term record remains strong.
In fact, this was the first year that Skyline Special Equities Portfolio
underperformed the Russell 2000 Index. The Portfolio has provided an annualized
return of nearly 16% since inception well above the 10% annualized return of the
Russell 2000 and the roughly 13% return of the S&P 500.
MARKET REVIEW
The fourth quarter continued many of the same trends that had been in place for
the first nine months. Large company stocks showed the best returns, with the
S&P 500 Index far outpacing the Russell 2000 Index. Out of the major sectors in
the small company area, health care and financial stocks provided the best
results. These sectors had been strong earlier in the year, and each ended the
year with approximately a 40% return. Technology, which had been the leader all
year, showed flat results in the final quarter but still ended the year with
nearly a 50% return. The weak groups in the quarter were the consumer and auto
and transportation areas, each showing negative results in the fourth quarter.
These groups ended the year with returns under 10%.
For the full year, the stock market was driven higher by a combination of rising
corporate earnings and declining interest rates. Large companies showed the best
earnings growth during the year, and consequently, showed the best stock market
performance. Their superior financial performance may have been the result of
significant overseas operations. A combination of better growth outside the
United States and a declining U.S. currency may have helped large multinational
companies in 1995. While small companies also showed earnings gains, they felt
the impact of a slowing domestic economy more keenly than large companies. This
slowdown in the domestic economy brought interest rates lower which, in turn,
sent P/E multiples higher in the stock market.
The slowdown in the U.S. economy had a major influence on the performance of
various stock market groups. The best performing areas were those that are less
economically sensitive. As mentioned above, health care and financial stocks
each achieved approximately 40% returns for the year. On the other end of the
spectrum, many economically sensitive groups showed relatively weak returns.
Small cap consumer stocks rose less than 10% for the year, as many retailers and
consumer products companies struggled. Intense competitive pressures, along with
less than robust demand, have hurt financial results at consumer companies.
Other areas more closely tied to the economy also suffered. Groups such as
automotive, trucking, building products, steel, and machinery showed well below
average returns.
The great rise in technology stocks was the big story of 1995. As mentioned
above, small cap technology stocks rose approximately 50% in 1995 due to
terrific demand for technology products. This performance enabled mutual fund
managers to show huge gains for the year if they had packed their portfolios
with technology stocks.
LARGEST PORTFOLIO WEIGHTINGS
INSURANCE 15.0%
HEALTH CARE 10.9%
RETAIL 9.0%
TECHNOLOGHY 8.0%
ENERGY RELATED 6.4%
4
<PAGE>
However, it appears at the time of this writing that the technology boom in the
stock market is ending. The fourth quarter results in this sector were not good,
and the new year is starting off weak. It is our opinion that the technology
boom we saw in 1995 is a once-a-decade phenomenon, and consequently, not likely
to be repeated for a while.
This was the second year in the past five years that the stock market saw an
"investment mania." In 1991 health care stocks skyrocketed, and then we
witnessed the boom in technology stocks in 1995. These events greatly
benefited "momentum investors"--growth stock managers who invest in sectors of
the market that have particularly strong earnings momentum.
In contrast, the past year has been difficult for investors with a
"contrarian" investment style. As an investor in low P/E stocks, we have a
"contrarian" component to our investment strategy. Many of our investments are
in companies where investor expectations are low due to a perception that the
company or industry may not show strong growth. Historically, we have been well
rewarded by this approach, as these companies perform better than expected.
However, in 1995, the consensus was right and contrarian investing did not
work. "In favor" stocks climbed throughout the year, while "out-of-favor"
stocks declined.
TOP TEN HOLDINGS
PERCENTAGE OF
CORPORATE NAME BUSINESS DESCRIPTION TOTAL NET ASSETS
- --------------------------------------------------------------------------------
PennCorp Financial Group, Inc. Insurance provider 2.3%
- --------------------------------------------------------------------------------
Allied Group, Inc. Auto and homeowners
insurance provider 2.1%
- --------------------------------------------------------------------------------
Integon Corp. High risk auto insurer 1.9%
- --------------------------------------------------------------------------------
Reinsurance Group of Amer. Life reinsurance provider 1.8%
- --------------------------------------------------------------------------------
American Heritage Life Life and health insurance
company 1.8%
- --------------------------------------------------------------------------------
North Fork Bancorp. Inc. Long Island, New York bank 1.7%
- --------------------------------------------------------------------------------
Libbey Inc. Glass tableware producer 1.6%
- --------------------------------------------------------------------------------
Pier 1 Imports, Inc. Specialty retailer 1.6%
- --------------------------------------------------------------------------------
Ameron, Inc. Construction products
manufacturer 1.6%
- --------------------------------------------------------------------------------
Furon Company Industrial products provider 1.6%
- --------------------------------------------------------------------------------
PORTFOLIO REVIEW
Our fourth quarter return of 0.5% was slightly below the Russell 2000 return due
to disappointing results in consumer and certain economically sensitive stocks.
As earnings results were released in the fourth quarter, it became clear that
the economy was softening and many small companies were struggling to increase
earnings.
For the full year, our performance was held back primarily by our sector
weightings. For most of the year, we had an overweighting in economically
sensitive groups and an underweighting in technology and health care.
Economically sensitive groups underperformed dramatically during the year
because companies in this area found it increasingly difficult to produce gains
in earnings. Investors abandoned such companies and embraced companies in
non-cyclical areas which presumably could grow their earnings in a slowing
economy.
The major area that helped us during the year was the financial area. We had a
large weighting in financial stocks throughout the year, with the biggest
position in insurance stocks. Many of these stocks showed substantial gains, led
by PennCorp Financial Group, a life and health
5
<PAGE>
care insurer that showed a gain of over 100% for the year.
Over the past few months, we have made two significant changes to the Portfolio.
First, we have reduced our exposure to economically sensitive groups and
increased our weightings in stocks that are less dependent on economic growth.
We still own plenty of companies that will benefit when the economy picks up,
but we have reduced our risk in the event that the economy continues to soften
or goes into a recession. Second, we have recently reduced the number of stocks
in the Portfolio, investing a greater percentage of our assets in those stocks
where we have the greatest confidence.
OUTLOOK
As is often the case, the outlook for the stock market is somewhat mixed. On the
positive side, the Federal Reserve Board is lowering interest rates and appears
concerned about improving economic activity. And while valuation levels are high
by historical standards, they are not high relative to current interest rate
levels. On the negative side, with earnings at extremely high levels and
interest rates so low, it may be that the stock market is near peak levels.
We continue to believe our Portfolio represents good value in an environment
where many stocks seem richly valued. Our stocks trade at a sharp valuation
discount to the market and could move sharply higher in the right type of
economic climate. We believe that an improvement in economic activity would be
the best thing for our Portfolio.
On a closing note, we want to remind you that, effective January 2, 1996,
Skyline Special Equities Portfolio permits additional investments from existing
shareholders. The Portfolio had been closed to new investments, other than in
retirement plans, for nearly three years because we believe that it is
advantageous to keep the asset base relatively small. However, because we feel
the asset base is now at a manageable level, we can now accommodate new
investments. We hope you will consider making an additional investment in the
Portfolio.
Sincerely,
William M. Dutton
Portfolio Manager
January 22, 1996
NOTES TO PERFORMANCE
(1) The method of calculating the average annual total return is described in
the Funds prospectus. Of course, past performance is no guarantee of future
results. The principal value and return on your investment will fluctuate
and on redemption may be worth more or less than your original cost. We have
included two unmanaged, market value weighted stock market indexes for
comparison purposes. The Russell 2000 Index includes small company stocks
such as those in Special Equities Portfolio. The S&P 500 Index, a widely
quoted stock market index, includes 500 of the largest companies publicly
traded in America. All figures take into account reinvested dividends.
(2) Return is calculated from the Portfolio's inception on April 23, 1987.
6
<PAGE>
PORTFOLIO HOLDINGS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Number
of Shares Market Value
<S> <C> <C>
COMMON STOCKS
APPAREL - 1.5%
Donnkenny, Inc.(a) 146,000 $ 2,646,250
AUTO PARTS - 2.0%
APS Holding Corp.(a) 12,400 279,000
Masland Corp. 146,100 2,045,400
SPX Corp. 76,200 1,209,675
-----------
3,534,075
CAPITAL GOODS - 1.3%
Alamo Group, Inc. 123,500 2,223,000
CHEMICALS - 0.8%
Univar Corporation 127,800 1,389,825
CONSTRUCTION/INFRASTRUCTURE - 1.6%
Ameron, Inc. 73,800 2,776,725
CONSUMER PRODUCTS - 3.4%
American Safety Razor Co.(a) 95,700 753,638
Carmike Cinemas, Inc.,
Class A(a) 102,700 2,310,750
Libbey Inc. 128,100 2,882,250
-----------
5,946,638
ENERGY RELATED - 6.4%
Aquila Gas Pipeline Corp. 185,700 2,390,888
Belden & Blake Corp.(a) 60,400 1,057,000
Daniel Industries, Inc. 130,800 1,863,900
Global Industries, Ltd.(a) 71,800 2,154,000
Pride Petroleum Services, Inc.(a) 181,200 1,925,250
Zeigler Coal Holding Co. 134,300 1,863,412
-----------
11,254,450
FINANCIAL RELATED - 24.1%
BANKS/THRIFTS - 5.5%
First Commerce Corp. 74,800 $ 2,393,600
GreenPoint Financial Corp. 75,600 2,022,300
North Fork Bancorp. Inc. 115,200 2,908,800
Webster Financial Corp. 79,200 2,336,400
-----------
9,661,100
FINANCIAL SERVICES - 3.6%
AMRESCO, Inc. 135,100 1,722,525
Legg Mason, Inc. 79,000 2,172,500
Raymond James Financial, Inc. 112,500 2,376,563
-----------
6,271,588
INSURANCE - 15.0%
Allied Group, Inc. 99,800 3,592,800
ALLIED Life Financial Corp. 109,900 1,991,938
American Heritage Life
Investment Corp. 136,900 3,131,588
AmVestors Financial Corp. 144,600 1,699,050
Executive Risk Inc. 81,200 2,354,800
Fremont General Corp. 61,500 2,260,124
Integon Corp. 161,600 3,333,000
PennCorp Financial Group, Inc. 136,700 4,015,562
Reinsurance Group of
America, Inc. 87,000 3,186,375
Selective Insurance Group, Inc. 20,200 717,100
-----------
26,282,337
-----------
TOTAL FINANCIAL RELATED 42,215,025
-----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number
of Shares Market Value
<S> <C> <C>
HEALTH CARE - 10.9%
Advanced Technology
Laboratories, Inc.(a) 109,400 $ 2,680,300
Allied Healthcare Products, Inc. 99,800 1,596,800
Community Psychiatric
Centers(a) 175,300 2,147,425
GranCare, Inc.(a) 141,500 2,051,750
Maxicare Health Plans, Inc.(a) 91,700 2,464,438
Maxxim Medical, Inc.(a) 113,700 1,904,475
RightCHOICE Managed
Care, Inc.(a) 104,400 1,357,200
Sierra Health Services, Inc.(a) 84,100 2,670,175
SpaceLabs Medical, Inc.(a) 75,000 2,156,250
-----------
19,028,813
HOMEBUILDING/BUILDING PRODUCTS - 2.5%
Interface, Inc. 129,600 2,203,200
Redman Industries, Inc.(a) 63,700 2,149,875
-----------
4,353,075
INDUSTRIAL PRODUCTS - 5.5%
Barnes Group Inc. 44,900 1,616,400
Bearings Inc. 80,400 2,351,700
Belden Inc. 86,200 2,219,650
Furon Company 138,700 2,774,000
SPS Technologies, Inc.(a) 13,680 730,170
-----------
9,691,920
METAL FABRICATION - 4.4%
CasTech Aluminum
Group Inc.(a) 127,800 1,725,300
Chase Brass Industries, Inc.(a) 173,900 2,195,488
Easco, Inc. 167,900 1,448,138
Sinter Metals, Inc.(a) 183,800 2,274,524
-----------
7,643,450
PACKAGING - 1.9%
Mail-Well, Inc.(a) 134,200 $ 1,643,950
Shorewood Packaging Corp.(a) 112,600 1,604,550
-----------
3,248,500
RESTAURANTS - 2.4%
Buffets, Inc.(a) 136,300 1,874,125
IHOP Corp.(a) 88,800 2,308,800
-----------
4,182,925
RETAIL - 9.0%
Aaron Rents, Inc., Class B 140,800 2,534,400
Cole National Corp.(a) 182,600 2,533,575
Pier 1 Imports, Inc. 248,915 2,831,407
Rex Stores Corp. 111,000 1,970,250
Rhodes, Inc.(a) 214,500 2,091,375
Stein Mart, Inc.(a) 168,800 1,856,800
Tractor Supply Company(a) 99,100 1,957,225
-----------
15,775,032
STEEL/IRON - 3.0%
Steel of West Virginia Inc.(a) 181,800 1,681,650
UCAR International Inc. 68,800 2,322,000
WCI Steel, Inc.(a) 279,100 1,221,062
-----------
5,224,712
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number
of Shares Market Value
<S> <C> <C>
TECHNOLOGY - 8.0%
Black Box Corp.(a) 92,100 $ 1,508,138
Dallas Semiconductor Corp. 85,900 1,782,425
Integrated Circuit Systems Inc.(a) 111,700 1,382,288
Keane, Inc.(a) 98,300 2,174,888
Marshall Industries(a) 59,800 1,921,075
Pioneer Standard
Electronics, Inc. 50,850 673,762
Primark Corp.(a) 91,300 2,739,000
Tracor, Inc.(a) 129,200 1,873,400
------------
14,054,976
TEMPORARY SERVICES - 2.2%
CDI Corp.(a) 97,400 1,753,200
Interim Services Inc.(a) 61,600 2,140,600
------------
3,893,800
TEXTILES - 0.9%
Galey & Lord, Inc.(a) 149,300 1,604,975
TRANSPORTATION/DELIVERY SERVICES - 3.5%
Interpool, Inc. 118,000 2,109,250
Landstar System Inc. 75,100 2,008,925
United TransNet, Inc.(a) 123,200 1,894,200
------------
6,012,375
------------
TOTAL COMMON STOCKS - 95.3%
(Cost: $146,604,315) 166,700,541
MONEY MARKET INSTRUMENTS (b)
Yield 5.32% to 5.53%
due March 1996 to August 1996
General Mills, Inc. $ 3,090,000
Sara Lee Corp. 1,019,014
Warner-Lambert Co. 3,470,000
Wisconsin Electric Power Co. 1,113,000
------------
TOTAL MONEY MARKET
INSTRUMENTS - 5.0%
(Cost: $8,692,014) 8,692,014
------------
TOTAL INVESTMENTS - 100.3%
(Cost: $155,296,329) 175,392,555
OTHER LIABILITIES LESS ASSETS - (0.3%) (493,083)
NET ASSETS - 100.0% $174,899,472
------------
------------
</TABLE>
(a) Non-income producing security.
(b) Variable rate securities. Interest rates are reset every seven days.
Rates shown are those in effect on December 31, 1995.
Based on cost of investments for federal income tax purposes of $155,296,329 on
December 31, 1995, net unrealized appreciation was $20,096,226. consisting of
gross unrealized appreciation of $27,579,880 and gross unrealized depreciation
of $7,483,654.
See accompanying notes to financial statements.
9
<PAGE>
STATEMENT OF
ASSETS & LIABILITIES
DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $155,296,329) $175,392,555
Receivable for:
Securities sold $2,355,495
Dividends and interest 136,746
Shares sold 46,946 2,539,187
----------- -----------
Total assets 177,931,742
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $138,040
Shares redeemed 2,667,711
Advisory fee 225,492
Trustees' fee 1,027 3,032,270
----------- -----------
Net assets applicable to
shares outstanding $174,899,472
-----------
-----------
Shares outstanding--no par value
(unlimited number of shares authorized) 10,418,330
-----------
-----------
PRICING OF SHARES
Net asset value, offering price, and
redemption price per share $16.79
-----------
-----------
ANALYSIS OF NET ASSETS
Excess of amounts received from issuance
of shares over amounts paid on
redemption of shares on account
of capital $152,951,201
Undistributed net realized gain on sales
of investments 1,852,045
Unrealized appreciation of investments 20,096,226
-----------
Net assets applicable to
shares outstanding $174,889,472
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Investment income:
Dividends $ 1,588,018
Interest 640,784
-----------
Total investment income 2,228,802
Expenses:
Investment advisory fee 2,890,146
Fees to unaffiliated trustees 13,337
-----------
Total expenses 2,903,483
-----------
Net investment loss (674,681)
Net realized and unrealized gain
on investments:
Net realized gain on sales
of investments 12,277,032
Net change in unrealized
appreciation 12,856,224
-----------
Net realized and unrealized gain
on investments 25,133,256
-----------
Net increase in net assets
resulting from operations $24,458,575
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DEC. 31, 1995 DEC. 31, 1994
- ----------------------------------------------------------------------------
<S> <C> <C>
From operations:
Net investment loss $ (674,681) $ (1,062,234)
Net realized gain on sales of investments 12,277,032 23,878,878
Net change in unrealized appreciation 12,856,224 (25,670,258)
------------- -------------
Net increase (decrease) in net assets
resulting from operations 24,458,575 (2,853,614)
Distributions to shareholders from
net realized gains (9,995,455) (22,571,495)
From share transactions:
Proceeds from shares sold 11,349,598 20,011,374
Reinvestment of capital gain
distribution 9,858,098 22,234,116
Payments for shares redeemed (63,542,803) (42,060,233)
------------- -------------
Net (decrease) increase in net assets
resulting from share transactions (42,335,107) 185,257
------------- -------------
Total decrease in net assets (27,871,987) (25,239,852)
Net assets at beginning of year 202,771,459 228,011,311
------------- -------------
Net assets at end of year $174,899,472 $202,771,459
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 15.64 $ 17.83 $ 17.12 $ 12.67 $ 10.32
--------- --------- --------- --------- ---------
Income from Investment Operations
Net investment (loss) income (0.06) (0.08) (0.09) (0.01) 0.01
Net realized and unrealized
gain (loss) on investments 2.21 (0.18) 3.94 5.37 4.74
--------- --------- --------- --------- ---------
Total from Investment Operations 2.15 (0.26) 3.85 5.36 4.75
--------- --------- --------- --------- ---------
Less Distributions
Dividends from net
investment income -- -- -- -- (0.01)
Dividends from net realized
gains on investments (1.00) (1.93) (3.14) (0.91) (2.39)
--------- --------- --------- --------- ---------
Total Distributions (1.00) (1.93) (3.14) (0.91) (2.40)
--------- --------- --------- --------- ---------
Net asset value at end of year $ 16.79 $ 15.64 $ 17.83 $ 17.12 $ 12.67
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total Return 13.83% (1.15%) 22.85% 42.45% 47.28%
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.51% 1.49% 1.48% 1.51% 1.55%
Ratio of net investment (loss) income
to average net assets (0.35%) (0.49%) (0.54%) (0.19%) 0.09%
Portfolio turnover rate 71% 82% 104% 87% 104%
Net assets, end of year
(in thousands) $174,899 $202,771 $228,011 $172,385 $ 37,495
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Note: Total return does not reflect the effect of any sales charges which may
have been previously charged.
See accompany notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Skyline Fund is an open-ended, diversified investment management company which
consists of Special Equities Portfolio and Special Equities II. The Portfolios
commenced public offering of their shares as follows: Special Equities Portfolio
on April 23, 1987, and Special Equities II on February 9, 1993. The following
notes relate solely to the accompanying financial statements of Special Equities
Portfolio ("Portfolio").
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. Money market instruments having 60 days or less remaining
from the valuation date until maturity are valued on an amortized cost basis.
Securities or other assets for which market quotations are not readily available
are valued at a fair value as determined in good faith by the Fund's board of
trustees.
- - SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of premium and discount on money
market instruments. Realized gains and losses from security transactions are
reported on an identified cost basis.
- - PORTFOLIO SHARE VALUATION - Portfolio shares are sold and redeemed on a
continuous basis at net asset value. Net asset value per share is determined as
of the close of regular session trading on the New York Stock Exchange (normally
3:00 p.m. Chicago time), each day the Exchange is open for trading. The net
asset value per share is determined by dividing the value of all securities and
other assets, less liabilities, by the number of shares of the Portfolio
outstanding.
- - FEDERAL INCOME TAXES, DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - It is the
Portfolio's policy to comply with the special provisions of the Internal Revenue
Code available to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income. Such provisions were complied
with and, therefore, no federal income taxes have been accrued.
- - EXPENSES - Expenses arising in connection with a Portfolio are allocated to
that Portfolio. Other Fund expenses, such as trustees' fees, are allocated
between the two Skyline Fund Portfolios.
- - RECLASSIFICATION - The 1995 net investment loss of $674,681 has been offset
against undistributed net realized gains at December 31, 1995.
2
TRANSACTIONS WITH AFFILIATES
Effective August 31, 1995, the Portfolio's Investment Adviser changed from
Mesirow Asset Management, Inc. to Skyline Asset Management, L.P. For the
Adviser's management and advisory services and the assumption of the Portfolio's
ordinary operating expenses, the Portfolio pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total advisory fee
13
<PAGE>
charged for the year ended December 31, 1995 was $2,890,146. The Adviser has
agreed to reimburse the Portfolio to the extent that the aggregate annual
expenses of the Portfolio, including the advisory fee and fees to unaffiliated
trustees, but excluding extraordinary costs or expenses such as legal,
accounting, or other costs or expenses not incurred in the normal course of the
Portfolio's ongoing operations, exceed 1.75% of the average daily net assets of
the Portfolio or such lower limit as is prescribed by any state in which the
Portfolio's shares are being offered for sale.
Portfolio brokerage commissions of $14,544 were paid by the Portfolio to Mesirow
Financial, Inc. during the eight-month period ended August 31, 1995, in
connection with the purchase and sale of investment securities. Mesirow
Financial, Inc. is affiliated with Mesirow Asset Management, Inc.
Certain officers and trustees of the Fund are also shareholders, officers,
and/or directors of the Adviser. The Fund makes no direct payments to its
officers or trustees who are affiliated with the Adviser.
For the year ended December 31, 1995, the Portfolio paid fees of $13,337 to its
unaffiliated trustees.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DEC. 31, 1995 DEC. 31, 1994
-------------------------------------------------------------
<S> <C> <C>
Shares sold 690,848 1,134,958
Shares issued
in reinvestment
of dividends 593,863 1,459,992
----------- -----------
1,284,711 2,594,950
Less shares redeemed (3,828,091) (2,418,477)
----------- -----------
Net (decrease) increase
in shares outstanding (2,543,380) 176,473
----------- -----------
----------- -----------
</TABLE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1995, are as follows:
Cost of purchases $128,339,423
Proceeds from sales 182,397,604
14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Skyline Special Equities Portfolio
and the Board of Trustees of Skyline Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Special Equities Portfolio as of
December 31, 1995, the related statements of operations for the year then ended
and changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Skyline Special Equities Portfolio at December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 19, 1996
15
<PAGE>
FEDERAL TAX STATUS OF 1995 DIVIDENDS
Capital gain dividends paid to you, whether received in cash or reinvested in
shares, must be included in your federal income tax return and must be reported
by the Fund to the Internal Revenue Service in accordance with U.S. Treasury
Department regulations. Short-term capital gain dividends paid to you are
taxable as ordinary income. Long-term capital gain dividends paid to you are
taxable as long-term capital gain income regardless of how long you have held
Fund shares.
REPORT FOR THE YEAR ENDED DECEMBER 31, 1995
This report, including the audited financial statements contained herein, is
submitted for the general information of the shareholders of the Portfolio. The
report is not authorized for distribution to prospective investors in the
Portfolio unless it is accompanied or preceded by a currently effective
prospectus of the Fund.
Funds Distributor, Inc. is the principal underwriter of Skyline Fund.
16
<PAGE>
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17
<PAGE>
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18
<PAGE>
19
<PAGE>
[LOGO]
SKYLINE FUND SPECIAL EQUITIES PORTFOLIO
ANNUAL REPORT -- DECEMBER 31, 1995
20
<PAGE>
[LOGO]
SKYLINE FUND
SPECIAL EQUITIES II
ANNUAL REPORT
DECEMBER 31, 1995
[LOGO]
SKYLINE FUND
311 South Wacker Drive
Suite 4500
Chicago, IL 60606
800-458-5222
1
<PAGE>
2
<PAGE>
[LOGO]
SKYLINE FUND SPECIAL EQUITIES II
DEAR SHAREHOLDER:
For the 12-month period ending December 31, 1995, Skyline Special Equities II
returned 21.0%. Two benchmarks of smaller company performance, the Russell 2000
Index and the S&P MidCap 400 Index, returned 28.4% and 31.0%, respectively.
In the fourth quarter, the Portfolio reported a 1.4% total return. This return
compares to 1.4% for the S&P MidCap 400 Index and 2.2% for the Russell 2000
Index. The net asset value for the Portfolio was $11.29 per share at year-end
after distributing $0.97 per share to our shareholders. The average annual total
return on an investment in Special Equities II for the period February 9, 1993
(inception) through December 31, 1995, was 9.8%.(1)
ANNUAL REVIEW
From a historical stock market perspective, the Portfolio's 1995 performance of
21% can be viewed as a very healthy return. On average, the S&P 500 Index, a
large company stock market composite, has returned 11% annually since 1965.(1)
However, 1995 was not a typical year for the stock market or our value-oriented
investment style. Primarily due to weak first half
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
CORPORATE NAME BUSINESS DESCRIPTION TOTAL NET ASSETS
- ------------------------------------------------------------------------------------
<S> <C> <C>
First Brands Corp. Consumer products firm 3.0%
- ------------------------------------------------------------------------------------
Jones Apparel Group, Inc. Apparel producer 3.0%
- ------------------------------------------------------------------------------------
AGCO Corp. Agricultural equipment manufacturer 3.0%
- ------------------------------------------------------------------------------------
UCAR International Inc. Steel materials supplier 2.8%
- ------------------------------------------------------------------------------------
Pier 1 Imports, Inc. Specialty retailer 2.7%
- ------------------------------------------------------------------------------------
Sierra Health Services, Inc. Health maintenance organization 2.7%
- ------------------------------------------------------------------------------------
Sybron International Corp. Dental/Laboratory equipment provider 2.7%
- ------------------------------------------------------------------------------------
Dial Corp. (The) Consumer products producer 2.6%
- ------------------------------------------------------------------------------------
Illinois Central Corp., Class A Railroad operator 2.6%
- ------------------------------------------------------------------------------------
PennCorp Financial Group, Inc. Life & health insurance provider 2.6%
- ------------------------------------------------------------------------------------
</TABLE>
ANNUAL REPORT -- DECEMBER 31, 1995
3
<PAGE>
results, the Portfolio trailed the U.S. stock market in 1995. The Portfolio's
strategy of investing in undervalued smaller companies was simply out of favor
over most of last year.
In 1995, the performance of large U.S. companies was simply incredible. For the
first time, the Dow Jones Industrial Average, a barometer of 30 publicly traded
large company stocks, broke through both the 4000 and the 5000 price levels. The
S&P 500's total return of 37.5% was the best year of performance since 1958.
While the stocks of smaller U.S. companies had good returns, they were well
below the performance of large company stocks in 1995. This large versus small
return differential contributed to the Portfolio's relative underperformance.
In 1995, smaller company investment managers using a growth-oriented investment
style tended to outperform
LARGEST PORTFOLLO WEIGHTINGS
INSURANCE 13.6%
CONSUMER PRODUCTS 10.3%
HEALTH CARE 7.8%
BANKS/THRIFTS 6.6%
ELECTRONIC 5.7%
COMPONENTS
value-oriented managers. This result was primarily due to growth managers' heavy
concentrations in the strong performing technology and health care sectors of
the stock market. The growth investment style places primary importance on the
rate of a firm's profit growth. These managers are willing to pay top dollar for
the fastest growing companies. Value managers, conversely, seek to pay a low
price for expected profit growth. This approach is akin to a bargain hunter
searching for both good quality and a good price. Because Special Equities II
uses a value driven, common sense approach, 1995 performance was weak relative
to the appropriate benchmarks.
The best performing economic sectors for the Russell MidCap Index in 1995
included financial, health care, and technology. The worst performing sectors
included consumer discretionary, producer durables, and materials and
processing. While the Portfolio was helped considerably by an overweighting in
financial stocks in 1995, underweighted positions in technology and health care
hindered the Portfolio's relative performance. The Portfolio was also hurt early
in 1995 by holdings in poor performing medical insurance and consumer retail
stocks.
In general, while being a contrarian investor can be productive in many market
environments, it did not work in 1995. During the year, those sectors selling at
a low stock price relative to current profit levels underperformed, while those
sectors with rapid profit growth and high stock prices surged. This environment
caused our value investment style to be out of favor for most of 1995.
FOURTH QUARTER REVIEW
As previously mentioned, in the fourth quarter, the Portfolio reported a 1.4%
total return. Once again, large company stocks outperformed small company
stocks, with the S&P 500 returning 5.9% in the quarter. As has been the case
almost all year, large companies benefited from strong export markets and
investors ran to safe harbors amidst economic and political concerns.
The best performing market sectors of the Russell MidCap Index in the fourth
quarter included health care, energy, and utilities. The worst performing
sectors included technology, producer durables, and consumer discretionary.
ANNUAL REPORT -- DECEMBER 31, 1995
4
<PAGE>
The most noteworthy factor in terms of general stock market performance during
the fourth quarter was the decline of technology stocks. These stocks had led
the market for over a year, with periods of absolute buying mania on the part of
investors. One of the key reasons for the Portfolio's relative underperformance
in 1995 had been our limited exposure to technology. Due to the weakness of the
technology sector in the fourth quarter, we were more than happy to have limited
exposure to that area during the period.
- ---------------------------------------------------------------------------
COMPARISON OF CHANGE
IN VALUE OF A $10,000
INVESTMENT SINCE INCEPTION
-----------------------------------
Average Annual Total Returns
-----------------------------------
1-Year Since Inception(2)
-----------------------------------
21.0% 9.8%
-----------------------------------
NOTE: PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SEE "NOTES TO
PERFORMANCE" FOLLOWING THIS LETTER.
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
INITIAL INVESTMENT 2/9/93-3/31/93 2 QTR 93 3 QTR 93 4 QTR 93 1 QTR 94 2 QTR 94 3 QTR 94
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES II $ 10,000 $ 10,060 $ 10,050 $ 10,410 $ 11,008 $ 10,835 $ 10,621 $ 11,284
RUSSELL 2000 $ 10,000 $ 9,976 $ 10,193 $ 11,084 $ 11,375 $ 11,073 $ 10,643 $ 11,381
S&P 400 $ 10,000 $ 10,126 $ 10,362 $ 10,883 $ 11,173 $ 10,750 $ 10,358 $ 11,059
S&P 500 $ 10,000 $ 10,177 $ 10,227 $ 10,490 $ 10,732 $ 10,322 $ 10,362 $ 10,872
</TABLE>
<TABLE>
<CAPTION>
4 QTR 94 1 QTR 95 2 QTR 95 3 QTR 95 4 QTR 95
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SPECIAL EQUITIES II $ 10,841 $ 11,119 $ 11,589 $ 12,926 $ 13,112
RUSSELL 2000 $ 11,168 $ 11,683 $ 12,776 $ 14,040 $ 14,346
S&P 400 $ 10,744 $ 11,624 $ 12,638 $ 13,871 $ 14,109
S&P 500 $ 10,873 $ 11,931 $ 13,070 $ 14,115 $ 14,954
</TABLE>
The Portfolio's return for the final quarter of 1995 was helped by our large
weighting in financial stocks and our holdings in consumer staples, retail, and
health care stocks. The Federal Reserve Board reduced interest rates for the
second time in 1995 during the quarter. This reduction reflected fears of a
slowing economy. The lower rates helped the Portfolio's financial stocks, and
the slow growth environment proved healthy for our consumer staples stocks.
The poor performance of the Portfolio's technology and industrial stocks in the
fourth quarter offset much of the gains by other areas. While we were not
overweighted in technology stocks, our holdings were impacted negatively in the
quarter. In addition, the slowing economy led to underperformance in our
industrial holdings.
At the end of the quarter, the Portfolio was 89% invested in stocks, while 11%
was held in cash and cash equivalents. On December 31, 1995, the Portfolio was
well diversified with 45 stock positions. During the quarter, 17 stocks were
sold from the Portfolio and 15 new positions were added. The majority of the
sales occurred due to stock prices reaching our disciplined sell targets.
OUTLOOK
Presently, the U.S. economy appears to be in relatively good shape, with low
interest rates, low inflation, full employment, and reasonable consumer
confidence levels. However, signs of a slowing economy have developed from a
number of sources such as purchasing managers surveys, auto sales, and machine
tool orders. Most economists agree that the U.S. economy will likely experience
slow growth in 1996. This slowed growth should bring further short-term interest
rate cuts by the Federal Reserve Board.
ANNUAL REPORT -- DECEMBER 31, 1995
5
<PAGE>
After an unusually strong stock market in 1995, many investors are concerned
about 1996. Generally, stock market forecasters see positive stock market
returns for the year. This view is based on a slow but growing economy, a
fiscally responsible government due to election year politics, and a Federal
Reserve Board inclined to lower interest rates if the economy slows too quickly.
Investors, however, should be aware that stocks overall are not cheap based on
historic valuation standards and rate reductions can take a long time to
strengthen the economy.
Low interest rates should continue to help financial services companies and may
spur demand for industrial stocks. These are two important areas for value
investors. The technology stock mania, which led to many growth managers'
spectacular 1995 results, appears to be over. In addition, technology stocks
will face increasingly difficult profit comparisons as 1996 unfolds. For these
reasons, we believe value managers may be able to outperform growth managers
over the next year.
Investors have preferred large company stocks over smaller company stocks for
the past two years. This preference is most likely due to their safety and
global growth prospects. Smaller company stocks, however, have tended to
outperform large company stocks over long periods of time. Generally, smaller
companies are able to react quicker to changing environments and grow faster
than large mature giants. Therefore, we believe as corporate profits slow,
smaller stocks may begin to outperform sometime during the course of 1996. In
the meantime, we will remain dedicated toward providing a well-diversified
portfolio of inexpensive small to midsized companies with good growth
prospects.
Sincerely,
/s/ Kenneth S. Kailin
Kenneth S. Kailin, CFA
Portfolio Manager
January 22, 1996
NOTES TO PERFORMANCE
1 The method of calculating the average annual total return is described in
the Fund's prospectus. Of course, past performance is no guarantee of
future results. The principal value and return on your investment will
fluctuate and on redemption may be worth more or less than your original
cost. We have included three unmanaged stock market indexes for comparison
purposes. The Russell 2000 Index is a portfolio of small company stocks.
The S&P MidCap 400 Index tracks the stock market performance of 400
medium-sized companies. The S&P 500 Index, a widely quoted stock market
index, includes 500 of the largest companies publicly traded in America.
All figures take into account reinvested dividends.
2 Return is calculated from the Portfolio's inception on February 9, 1993.
ANNUAL REPORT -- DECEMBER 31, 1995
6
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO HOLDINGS
DECEMBER 31, 1995
NUMBER
OF SHARES MARKET VALUE
--------- ---------------
<S> <C> <C>
COMMON STOCKS
APPAREL/TEXTILES -- 3.0%
Jones Apparel Group, Inc.(a) 68,000 $ 2,677,500
AUTO PARTS -- 2.4%
Echlin Inc. 59,600 2,175,400
BANKS/THRIFTS -- 6.6%
Cullen/Frost Bankers, Inc. 36,200 1,810,000
GreenPoint Financial Corp. 76,500 2,046,375
Southern National Corp. 76,925 2,019,281
--------------
5,875,656
BUILDING PRODUCTS -- 3.8%
American Standard Co. 72,300 2,024,400
Interface, Inc. 79,700 1,354,900
--------------
3,379,300
CAPITAL GOODS -- 3.0%
AGCO Corp. 51,900 2,646,900
COMPUTER PRODUCTS AND COMPONENTS -- 3.6%
Gateway 2000, Inc.(a) 64,200 1,572,900
Komag, Inc.(a) 34,800 1,605,150
--------------
3,178,050
CONSUMER PRODUCTS -- 10.3%
Alberto-Culver Co., Class A 74,300 2,266,150
Dial Corp. (The) 79,000 2,340,375
First Brands Corp. 56,600 2,695,575
Hudson Foods, Inc., Class A 110,200 1,900,950
--------------
9,203,050
CONSUMER SERVICES -- 1.5%
Buffets, Inc.(a) 85,300 $ 1,172,875
Royal Caribbean Cruises Ltd. 6,000 132,000
--------------
1,304,875
ELECTRONIC COMPONENTS -- 5.7%
Arrow Electronics, Inc.(a) 43,100 1,858,688
Dallas Semiconductor Corp. 63,300 1,313,475
Marshall Industries(a) 60,800 1,953,200
--------------
5,125,363
ENERGY -- 1.8%
Newfield Exploration Company(a) 59,500 1,606,500
FINANCIAL SERVICES -- 5.4%
Advanta Corporation, Class B 45,400 1,651,425
AMRESCO, Inc. 72,300 921,825
AT&T Capital Corp. 18,800 719,100
Finova Group, Inc. 31,700 1,529,525
--------------
4,821,875
HEALTH CARE -- 7.8%
Community Psychiatric Centers(a) 175,700 2,152,325
Sierra Health Services, Inc.(a) 76,700 2,435,225
Sybron International Corp.(a) 99,600 2,365,500
--------------
6,953,050
INDUSTRIAL PRODUCTS -- 5.6%
Belden Inc. 82,000 2,111,500
Kaydon Corp. 44,000 1,336,500
Mark IV Industries, Inc. 79,825 1,576,544
--------------
5,024,544
ANNUAL REPORT -- DECEMBER 31, 1995
7
<PAGE>
NUMBER
OF SHARES MARKET VALUE
--------- --------------
INSURANCE -- 13.6%
Fremont General Corp. 50,800 $ 1,866,900
Paul Revere Corp. (The) 83,000 1,722,250
PennCorp Financial Group, Inc. 77,300 2,270,688
PMI Group, Inc. (The) 38,400 1,737,600
Prudential Reinsurance
Holdings, Inc. 96,500 2,255,687
Reinsurance Group of
America, Inc. 51,600 1,889,850
Selective Insurance Group, Inc. 10,600 376,300
--------------
12,119,275
RAILROADS -- 2.8%
Canadian National Railway Co.(a) 14,500 217,500
Illinois Central Corp., Class A 59,500 2,283,313
--------------
2,500,813
REAL ESTATE INVESTMENT TRUSTS -- 3.6%
Patriot American Hospitality, Inc. 57,900 1,490,925
Public Storage, Inc. 91,000 1,729,000
--------------
3,219,925
RETAIL -- 4.5%
Claire's Stores, Inc. 88,800 1,565,100
Pier 1 Imports, Inc. 215,350 2,449,606
--------------
4,014,706
STEEL/IRON -- 3.5%
UCAR International Inc.(a) 73,300 2,473,875
WCI Steel, Inc.(a) 150,600 658,875
--------------
3,132,750
--------------
TOTAL COMMON STOCKS -- 88.5%
(Cost: $68,580,264) 78,959,532
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
------------
<S> <C>
MONEY MARKET INSTRUMENTS(b)
Yield 5.49% to 5.53%
due March 1996 to August 1996
American Family Financial Services, Inc. $ 270,000
General Mills, Inc. 2,350,000
Sara Lee Corp. 2,119,701
Warner-Lambert Co. 4,485,000
Wisconsin Electric Power Co. 480,000
--------------
TOTAL MONEY MARKET
INSTRUMENTS -- 10.9%
(Cost: $9,704,701) 9,704,701
--------------
TOTAL INVESTMENTS -- 99.4%
(Cost: $78,284,965) 88,664,233
OTHER ASSETS
LESS LIABILITIES -- 0.6% 539,028
--------------
NET ASSETS -- 100.0% $ 89,203,261
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Variable rate securities. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on December 31, 1995.
Based on cost of investments for federal income tax purposes of $78,284,965 on
December 31, 1995, net unrealized appreciation was $10,379,268, consisting of
gross unrealized appreciation of $11,992,913 and gross unrealized depreciation
of $1,613,645.
See accompanying notes to financial statements.
ANNUAL REPORT -- DECEMBER 31, 1995
8
<PAGE>
STATEMENT OF
ASSETS & LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $78,284,965) $88,664,233
Receivable for:
Dividends and interest $ 141,310
Shares sold 694,895 836,205
-----------
Organization costs,
net of accumulated
amortization of $11,658 10,583
-----------
Total assets 89,511,021
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 78,775
Shares redeemed 102,878
Advisory fees 112,085
Trustees' fees 1,876
Organization costs 11,946
Dividends 200 307,760
---------- -----------
Net assets applicable to
shares outstanding $89,203,261
-----------
-----------
Shares outstanding--no par
value (unlimited number of
shares authorized) 7,900,323
-----------
-----------
PRICING OF SHARES
Net asset value, offering price,
and redemption price per share $11.29
-----------
-----------
ANALYSIS OF NET ASSETS
Excess of amounts received from
issuance of shares over amounts
paid on redemption of shares
on account of capital $78,652,675
Undistributed net investment income 34,255
Undistributed net realized gain on sales
of investments 137,063
Unrealized appreciation of investments 10,379,268
-----------
Net assets applicable to
shares outstanding $89,203,261
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Investment income:
Dividends $ 1,497,267
Interest 390,810
------------
Total investment income 1,888,077
Expenses:
Investment advisory fee 1,407,252
Fees to unaffiliated trustees 13,311
Amortization of organization costs 2,712
------------
Total expenses 1,423,275
------------
Net investment income 464,802
Net realized and unrealized
gain on investments:
Net realized gain on sales
of investments 6,706,516
Net change in unrealized appreciation 10,355,575
------------
Net realized and unrealized
gain on investments 17,062,091
------------
Net increase in net assets
resulting from operations $ 17,526,893
------------
------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT -- DECEMBER 31, 1995
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DEC. 31, 1995 DEC. 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Net investment income $ 464,802 $ 167,848
Net realized gain on sales of investments 6,706,516 3,856,518
Net change in unrealized appreciation 10,355,575 (5,350,384)
------------ ------------
Net increase (decrease) in net assets
resulting from operations 17,526,893 (1,326,018)
Distributions to shareholders from:
Net investment income (430,547) (167,848)
Net realized gains (6,569,453) (3,944,186)
Return of capital -- (26,346)
------------ ------------
Total distributions (7,000,000) (4,138,380)
From share transactions:
Proceeds from shares sold 15,771,709 60,932,770
Reinvestment of dividends and capital gain distributions 6,866,829 4,028,245
Payments for shares redeemed (43,600,025) (18,466,434)
------------ ------------
Net (decrease) increase in net assets resulting from
share transactions (20,961,487) 46,494,581
------------ ------------
Total (decrease) increase in net assets (10,434,594) 41,030,183
Net assets at beginning of year 99,637,855 58,607,672
------------ ------------
Net assets at end of year $ 89,203,261 $ 99,637,855
------------ ------------
------------ ------------
</TABLE>
See accompaying notes to financial statements.
ANNUAL REPORT -- DECEMBER 31, 1995
10
<PAGE>
FINANCIAL HIGHLIGHT
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED YEAR ENDED FEB 9, 1993(a)-
DEC. 31, 1995 DEC. 31, 1994 DEC. 31, 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period $ 10.14 $ 10.79 $ 10.00
------- ------- -------
Income from Investment Operations
Net investment income 0.06 0.02 0.01
Net realized and unrealized
gain (loss) on investments 2.06 (0.19) 1.00
------- ------- -------
Total from Investment Operations 2.12 (0.17) 1.01
------- ------- -------
Less Distributions
Dividends from net
investment income (0.06) (0.02) --
Dividends from net realized
gains on investments (0.91) (0.46) (0.22)
Return of capital distribution -- --(d) --
------- ------- -------
Total Distributions (0.97) (0.48) (0.22)
------- ------- -------
Net asset value at end of period $ 11.29 $ 10.14 $ 10.79
------- ------- -------
------- ------- -------
Total Return 20.95% (1.52%) 10.08% (c)
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.52% 1.51% 1.51% (b)
Ratio of net investment income (loss)
to average net assets 0.50% 0.22% (0.10%)(b)
Portfolio turnover rate 102% 82% 111% (b)
Net assets, end of period
(in thousands) $89,203 $99,638 $58,608
------- ------- -------
------- ------- -------
(a) Commencement of operations.
(b) Ratios have been determined on an annualized basis.
(c) For the period February 9, 1993 to December 31, 1993.
(d) Distributions were less than $0.01 per share.
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT -- DECEMBER 31, 1995
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Skyline Fund is an open-ended, diversified investment management company which
consists of the Special Equities Portfolio and Special Equities II. The
Portfolios commenced public offering of their shares as follows: Special
Equities Portfolio on April 23, 1987, and Special Equities II on February 9,
1993. The following notes relate solely to the accompanying financial statements
of Special Equities II ("Portfolio").
1
SIGNIFICANT ACCOUNTING POLICIES
/ / SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. Money market instruments having 60 days or less remaining
from the valuation date until maturity are valued on an amortized cost basis.
Securities or other assets for which market quotations are not readily available
are valued at a fair value as determined in good faith by the Fund's board of
trustees.
/ / SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed), and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of money market instrument
premium and discount. Realized gains and losses from security transactions are
reported on an identified cost basis.
/ / PORTFOLIO SHARE VALUATION - Portfolio shares are sold on a continuous basis
and redeemed on a continuous basis at net asset value. Net asset value per share
is determined as of the close of regular session trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time) each day the Exchange is open for
trading. The net asset value per share is determined by dividing the value of
all securities and other assets, less liabilities, by the number of shares of
the Portfolio outstanding.
/ / FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Portfolio's policy to comply with the special provisions of the Internal
Revenue Code available to regulated investment companies and, in the manner
provided therein, to distribute all of its taxable income. Such provisions were
complied with and, therefore, no federal income taxes have been accrued.
/ / EXPENSES - Expenses arising in connection with a Portfolio are allocated to
that Portfolio. Other Fund expenses, such as trustees' fees, are allocated
between the two Skyline Fund Portfolios.
2
TRANSACTIONS WITH AFFILIATES
Effective August 31, 1995, the Portfolio's Investment Adviser changed from
Mesirow Asset Management, Inc. to Skyline Asset Management, L.P. For the
Adviser's management and advisory services and the assumption of the
Portfolio's ordinary operating expenses, the Portfolio pays a monthly
comprehensive fee based on its average daily net assets at the annual rate of
1.50% of the first $200 million, 1.45% of the next $200 million, 1.40% of the
next $200 million, and 1.35% of any excess over $600 million. The total advisory
fee charged for year ended December 31, 1995 was $1,407,252. The Adviser has
agreed to reimburse the Portfolio to the extent that the aggregate annual
expenses of the
ANNUAL REPORT -- DECEMBER 31, 1995
12
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Portfolio, including the advisory fee and fees to unaffiliated trustees, but
excluding extraordinary costs or expenses such as legal, accounting, or other
costs or expenses not incurred in the normal course of the Portfolio's ongoing
operations, exceed 2.00% of the average daily net assets of the Portfolio or
such lower limit as is prescribed by any state in which the Portfolio's shares
are being offered for sale.
Certain officers and trustees of the Fund are also shareholders, officers,
and/or directors of the Adviser. The Fund makes no direct payments to its
officers or trustees who are affiliated with the Adviser.
For the year ended December 31, 1995, the Portfolio paid fees of $13,311 to its
unaffiliated trustees.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DEC. 31, 1995 DEC. 31, 1994
- ----------------------------------------------------------------
<S> <C> <C>
Shares sold 1,461,900 5,720,483
Shares issued
in reinvestment
of dividends 613,104 402,406
---------- ----------
2,075,004 6,122,889
Less shares redeemed (3,998,270) (1,729,714)
---------- ----------
Net (decrease) increase
in shares outstanding (1,923,266) 4,393,175
---------- ----------
---------- ----------
</TABLE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1995, are as follows:
<TABLE>
<S> <C>
Cost of purchases $89,475,877
Proceeds from sales 121,103,082
</TABLE>
ANNUAL REPORT -- DECEMBER 31, 1995
13
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REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Skyline Special Equities II
and the Board of Trustees of Skyline Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Special Equities II as of December 31,
1995, the related statements of operations for the year then ended and changes
in net assets for each of the two years in the period then ended, and the
financial highlights for each of the two years in the period then ended and for
the period from February 9, 1993 to December 31, 1993. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Skyline Special Equities II at December 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the two years
in the period then ended, and for the period from February 9, 1993 to December
31, 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 19, 1996
ANNUAL REPORT -- DECEMBER 31, 1995
14
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FEDERAL TAX STATUS OF 1995 DIVIDENDS
Capital gain dividends paid to you, whether received in cash or reinvested in
shares, must be included in your federal income tax return and must be reported
by the Fund to the Internal Revenue Service in accordance with U.S. Treasury
Department regulations. Short-term capital gain dividends paid to you are
taxable as ordinary income. Long-term capital gain dividends paid to you are
taxable as long-term capital gain income regardless of how long you have held
Fund shares.
REPORT FOR THE YEAR ENDED DECEMBER 31, 1995
This report, including the audited financial statements contained herein, is
submitted for the general information of the shareholders of the Portfolio. The
report is not authorized for distribution to prospective investors in the
Portfolio unless it is accompanied or preceded by a currently effective
prospectus of the Fund.
Funds Distributor, Inc. is the principal underwriter of Skyline Fund.
ANNUAL REPORT -- DECEMBER 31, 1995
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SKYLINE FUND SPECIAL EQUITIES II
ANNUAL REPORT - DECEMBER 31, 1995
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