<PAGE>
[LOGO]
Skyline Special Equities Portfolio
Investing in small-sized companies
- ------------------------- STRATEGY
- Value orientation - low price/earnings ratio-
20% plus discount to the market
- Attention to growth - forecasted EPS growth in
the 10% to 20% range
- Focus on "neglected" companies - limited
Wall Street research coverage
- Market cap range of $100 million to $700 million
JUNE 30, 1996
<PAGE>
LETTER FROM WILLIAM M. DUTTON, PORTFOLIO MANAGER:
- --------------------------------------------------------------------------------
July 22,1996
Dear Shareholder:
We are pleased to report that Skyline Special Equities Portfolio showed
excellent results in the June quarter. The net asset value closed the period at
$19.37 per share, producing a gain of 11.6% compared to a gain of 5.0% for the
Russell 2000 Index. For the six months ending in June, the Portfolio gained
15.4% compared to 10.4% for the Russell 2000 Index. This strong performance was
due to improved results from certain sectors that are heavily weighted in the
Portfolio, such as consumer and economically sensitive stocks, and good
individual stock selection.
The stock market increase in the June quarter may be attributed to a stronger
than expected economy, which should translate into better than expected earnings
gains in many sectors. Small cap stocks slightly outperformed large cap stocks
during the period, and consequently, hold a slight edge for the first six months
of 1996. Small cap stocks are prime beneficiaries of strong economic growth and
have been performing better since evidence of an improved economy has appeared.
Growth stocks performed better than value stocks due to spectacular results in
April and May, although June saw some of those gains disappear.
Within the small cap arena, the best performing sectors for both the quarter and
first half were the consumer and energy areas. The performance of the consumer
area is particularly notable because it had done so poorly during the bull
market of 1995. Consumer spending has been surprisingly strong in 1996, with
retail and auto sales leading the way. Energy stocks, the market leaders for the
year, have done well due to higher natural gas prices and recent advancements in
drilling technology that improve the success rate for finding oil and gas.
The Portfolio's strong performance was due to improved results from economically
sensitive stocks and good overall stock selection. Among the top performing
stocks in the Portfolio were companies in the automotive, building products,
chemical, consumer, and transportation areas. In addition, the Portfolio
benefited from two takeovers and numerous stocks that did well due to very
strong company specific fundamentals. Finally, a key reason for the strong
quarter was a lack of problem stocks in the period. The Portfolio had few
companies report disappointing news, and therefore few stocks showed major
declines in the period.
Although at the time of this writing the market has suffered a setback, we are
very optimistic about the prospects for our small cap value-oriented investment
style. We believe, based on relative valuation measures, that small stocks are
currently undervalued compared to large stocks. And within the small cap
universe, the value segment is at a low valuation level relative to normal. This
situation exists at a time when the economy is getting better, which should have
a greater positive impact on small companies, particularly many in
value-oriented sectors. Consequently, the potential exists for an improvement in
both relative earnings growth and relative valuation for the kinds of small
companies in which the Portfolio invests. We believe this would have a positive
impact on the Portfolio.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE (%)(1)
- -------------------------------------------------------------------------------------------------
Qtr2 YTD Since
1996 1996 1 yr. 3 yrs. 5 yrs. Inception(2)
<S> <C> <C> <C> <C> <C> <C>
Special Equities 11.64 15.37 23.57 13.66 21.25 16.47
Russell 2000 5.00 10.36 23.89 15.81 17.51 10.63
S&P 500 4.54 10.24 26.12 17.25 15.75 13.09
</TABLE>
<TABLE>
<CAPTION>
Calendar Years
1995 1994 1993 1992 1991 1990 1989 1988 1987 (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Special Equities 13.8 -1.2 22.9 42.4 47.4 -9.3 24.0 29.7 -16.9
Russell 2000 28.4 -1.8 18.9 18.4 46.1 -19.5 16.2 24.9 -24.3
S&P 500 37.5 1.3 10.0 7.7 30.6 -3.2 31.4 16.5 -12.0
</TABLE>
PORTFOLIO WEIGHTINGS
- --------------------------------------------------------------------------------
[PIE CHART]
Autos & Transportation 6.5%
Cash 1.9%
Utilities 1.4%
Technology 8.1%
Consumer Discretionary 17.2%
Producer Durables 6.9%
Consumer Staples 1.3%
Energy 8.3%
Materials & Processing 19.4%
Health Care 4.0%
Financial Services 25.0%
SEMI-ANNUAL REPORT - JUNE 30, 1996
SECTOR PERFORMANCE
- --------------------------------------------------------------------------------
SPECIAL RUSSELL
EQUITIES 2000
CONSUMER STAPLES 22.6% -1.0%
ENERGY 21.4 15.5
CONSUMER DISCRETIONARY 20.8 10.9
TECHNOLOGY 20.7 5.4
AUTOS & TRANSPORTATION 18.8 5.9
MATERIALS & PROCESSING 18.6 3.5
FINANCIAL SERVICES 6.3 3.3
OTHER 0.0 0.7
PRODUCER DURABLES -2.4 5.5
UTILITIES -3.2 2.3
HEALTH CARE -9.1 0.9
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
PORTFOLIO CHARACTERISTICS (1)
- --------------------------------------------------------------------------------
SPECIAL
EQUITIES RUSSELL 2000 S&P 500
P/E RATIO (MEDIAN) 14.9 23.8 18.7
PRICE/BOOK 2.02 2.45 3.13
PRICE/SALES 0.79 1.21 1.30
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT
FISCAL YEAR AVERAGE 22.0% 19.9% 13.2%
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $380 million $500 million $22 billion
PORTFOLIO VALUE $162 million $655 billion $5,063 billion
NUMBER OF HOLDINGS 68 2,000 500
- --------------------------------------------------------------------------------
TICKER SYMBOL: SKSEX
CUSIP #: 830833208
INITIAL INVESTMENT: $1,000
1-800-458-5222
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
EXCEL INDUSTRIES, INC. (EXC)
Excel Industries is the leading manufacturer of window and door systems for the
automotive market. The company has an outstanding growth record that was
achieved through market share gains and acquisitions. Recently, the company
made its largest acquisition, which has the potential to be very additive to
earnings. Meanwhile, the core business is performing well because of
improvement in the automotive industry. Despite a very positive earnings
outlook, the stock is extremely inexpensive, trading near book value and near 10
times earnings.
INTEGON CORPORATION (IN)
Integon provides automotive insurance for hard-to-insure drivers and other
specialty automobile insurance products. In addition to participating in an
industry that is showing 10% annual growth, Integon is benefiting from
geographic expansion and a favorable pricing environment. Despite an excellent
growth outlook, the stock trades at only 13 times earnings, a discount to the
market.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
TOP TEN HOLDINGS % OF NET ASSETS
- --------------------------------------------------------------------------------
FURON COMPANY
Manufacturer of Polymer-Based Industrial Products 2.6%
HARMAN INTERNATIONAL INDUSTRIES, INC.
Producer of Audio Equipment 2.5%
ALLIED GROUP, INC.
Personal Lines Insurance Company 2.5%
IHOP CORP.
Operator/Franchiser of Casual Dining Restaurants 2.2%
FLORES & RUCKS, INC.
Oil & Gas Producer 2.2%
BLACK BOX CORP.
Computer Networking Products Distributor 2.1%
AARON RENTS, INC.
Operator/Franchiser of Rental Furniture Stores 2.0%
LIBBEY INC.
Glass Tableware Manufacturer 2.0%
DECISIONONE HOLDINGS CORP.
Computer Services Firm 2.0%
AMERICAN HERITAGE LIFE INVESTMENT CORP.
Life Insurance Company 1.9%
TOP TEN HOLDINGS 22.0%
(1) The performance for the one, three, and five years ended June 30, 1996, and
for the period April 23, 1987 (inception) through June 30, 1996, is an
average annual total return calculation which 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.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-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. All indexes
and portfolio characteristics are compiled by Frank Russell Company.
(2) Return is calculated from the Portfolio's inception on April 23, 1987.
(3) Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor, Inc.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
PORTFOLIO HOLDINGS AS OF JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
Number
Of Shares Market Value
------------- ----------------
COMMON STOCKS
AUTOS & TRANSPORTATION - 6.5%
AUTO RELATED - 3.3%
APS Holding Corp.(a) 56,100 $ 1,234,200
Borg-Warner Automotive, Inc. 60,200 2,377,900
Excel Industries, Inc. 133,000 1,662,500
---------------
5,274,600
OTHER TRANSPORTATION - 3.2%
Hub Group, Inc.(a) 28,200 574,575
Interpool, Inc. 116,600 2,127,950
Pittston Burlington Group 116,800 2,525,800
---------------
5,228,325
---------------
TOTAL AUTOS & TRANSPORTATION 10,502,925
CONSUMER DISCRETIONARY - 17.2%
CONSUMER PRODUCTS/SERVICES - 9.3%
Carmike Cinemas, Inc.(a) 85,400 2,305,800
Furniture Brands International, Inc.(a) 214,600 2,360,600
Harman International Industries, Inc. 83,300 4,102,525
Libbey Inc. 115,200 3,196,800
Toro Co. (The) 93,400 3,093,875
---------------
15,059,600
RESTAURANTS - 2.2%
IHOP Corp.(a) 132,800 3,585,600
RETAIL - 5.7%
Aaron Rents, Inc. 256,600 3,239,575
Cole National Corp.(a) 134,900 2,698,000
Pier 1 Imports, Inc. 160,515 2,387,660
Rhodes, Inc.(a) 69,300 770,963
---------------
9,096,198
---------------
TOTAL CONSUMER DISCRETIONARY 27,741,398
CONSUMER STAPLES - 1.3%
Suiza Foods Corp.(a) 125,200 2,159,700
ENERGY - 8.3%
EQUIPMENT & SERVICES - 1.2%
Daniel Industries, Inc. 135,300 1,961,850
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
Number
Of Shares Market Value
------------- ----------------
EXPLORATION & PRODUCTION - 3.7%
Belden & Blake Corp.(a) 121,300 $ 2,516,975
Flores & Rucks, Inc.(a) 101,000 3,484,500
-------------
6,001,475
OTHER ENERGY - 3.4%
Aquila Gas Pipeline Corp. 219,700 2,856,100
Zeigler Coal Holding Co. 166,300 2,660,800
-------------
5,516,900
-------------
TOTAL ENERGY 13,480,225
FINANCIAL SERVICES - 25.0%
BANKS/THRIFTS - 4.0%
First Commerce Corp. 85,600 3,028,100
Texas Regional Bancshares Inc. 50,800 1,270,000
Webster Financial Corp. 79,600 2,228,800
-------------
6,526,900
LIFE INSURANCE - 3.8%
American Heritage Life Investment Corp. 143,100 3,130,312
Reinsurance Group of America, Inc. 78,600 2,967,150
-------------
6,097,462
OTHER INSURANCE - 12.3%
Allied Group, Inc. 91,900 3,997,650
Chartwell Re Corporation(a) 78,400 1,734,600
Delphi Financial Group, Inc.(a) 109,100 2,945,700
Financial Security Assurance Holdings Ltd. 101,000 2,764,875
Horace Mann Educators Corp. 75,300 2,390,775
Integon Corp. 145,900 2,936,238
PennCorp Financial Group, Inc. 97,800 3,105,150
-------------
19,874,988
OTHER FINANCIAL - 4.9%
AmVestors Financial Corp. 154,800 2,438,100
Legg Mason, Inc. 51,000 1,644,750
Olympic Financial Ltd.(a) 89,900 2,067,700
Raymond James Financial, Inc. 74,400 1,683,300
-------------
7,833,850
-------------
TOTAL FINANCIAL SERVICES 40,333,200
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
Number
Of Shares Market Value
------------- ----------------
HEALTH CARE - 4.0%
HEALTH CARE SERVICES - 1.4%
Sierra Health Services, Inc.(a) 74,300 $ 2,340,450
MEDICAL EQUIPMENT/PRODUCTS - 2.6%
Fisher Scientific International Inc. 51,000 1,912,500
Maxxim Medical, Inc.(a) 129,700 2,221,113
---------------
4,133,613
---------------
TOTAL HEALTH CARE 6,474,063
MATERIALS & PROCESSING - 19.4%
BUILDING/CONSTRUCTION PRODUCTS - 6.9%
Ameron International Corp. 72,400 2,859,800
Apogee Enterprises, Inc. 88,300 3,024,275
Dayton Superior Corp. 90,700 1,190,438
Interface, Inc. 167,800 2,600,900
Triangle Pacific Corp.(a) 78,200 1,544,450
---------------
11,219,863
INDUSTRIAL PRODUCTS - 3.6%
Brady (W.H.) Co. 75,900 1,688,775
Furon Company 171,900 4,254,525
---------------
5,943,300
METAL FABRICATIONS - 5.9%
CasTech Aluminum Group Inc.(a) 150,400 2,218,400
Chase Brass Industries, Inc.(a) 98,500 1,834,562
Citation Corp.(a) 61,000 732,000
Easco, Inc. 224,500 1,852,125
Sinter Metals, Inc.(a) 166,500 2,913,750
---------------
9,550,837
PACKAGING - 1.2%
Shorewood Packaging Corp.(a) 122,000 1,875,750
SPECIALTY CHEMICALS - 0.1%
Lilly Industries, Inc. 6,600 112,200
STEEL/IRON -1.7%
Steel of West Virginia Inc.(a) 172,500 1,552,500
WCI Steel, Inc. 215,000 1,128,750
---------------
2,681,250
---------------
TOTAL MATERIALS & PROCESSING 31,383,200
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
Number
Of Shares Market Value
------------- ----------------
PRODUCER DURABLES - 6.9%
CAPITAL GOODS - 4.8%
Alamo Group, Inc. 120,100 $ 2,191,825
Applied Power Inc. 89,700 2,511,600
Belden Inc. 103,200 3,096,000
---------------
7,799,425
INDUSTRIAL DISTRIBUTION - 0.6%
Bearings Inc. 33,900 915,300
OFFICE FURNITURE - 1.5%
Herman Miller, Inc. 77,800 2,382,625
---------------
TOTAL PRODUCER DURABLES 11,097,350
TECHNOLOGY - 8.1%
Berg Electronics Corp.(a) 107,100 2,543,625
Black Box Corp.(a) 142,700 3,389,125
Dallas Semiconductor Corp. 118,100 2,140,563
DecisionOne Holdings Corp.(a) 133,700 3,175,375
DuPont Photomasks, Inc. 93,300 1,912,650
---------------
TOTAL TECHNOLOGY 13,161,338
UTILITIES - 1.4%
Enron Global Power & Pipelines Corp. 92,500 2,243,124
---------------
TOTAL COMMON STOCKS - 98.1%
(Cost: $135,748,411) 158,576,523
MONEY MARKET INSTRUMENTS(b)
Yield 4.98% to 5.19%
due October 1996 to March 1997
Eli Lilly & Co. 739,835
Pitney Bowes, Inc. 132,314
Southwestern Bell Corp. 2,000,000
Warner-Lambert Co. 2,562,466
Wisconsin Electric Power Co. 1,310,000
---------------
TOTAL MONEY MARKET INSTRUMENTS - 4.2%
(Cost: $6,744,615) 6,744,615
---------------
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
Market Value
--------------
TOTAL INVESTMENTS - 102.3%
(Cost: $142,493,026) $165,321,138
OTHER LIABILITIES LESS ASSETS - (2.3%) (3,766,947)
--------------
NET ASSETS - 100.0% $161,554,191
--------------
--------------
(a) Non-income producing security.
(b) Variable rate securities. Interest rates are reset every seven days. Rates
shown are those in effect on June 30, 1996.
Based on cost of investments for federal income tax purposes of $142,493,026 on
June 30, 1996, net unrealized appreciation was $22,828,112, consisting of gross
unrealized appreciation of $26,660,662 and gross unrealized depreciation of
$3,832,550.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
STATEMENT OF ASSETS & LIABILITIES AS OF JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Cost: $142,493,026) $165,321,138
Receivable for:
Securities sold $2,169,879
Dividends and interest 123,155
Shares sold 398,868 2,691,902
-------------- --------------
Total assets 168,013,040
LIABILITIES & NET ASSETS
Payable for:
Securities purchased 960,777
Shares redeemed 5,289,767
Advisory fee 206,396
Trustees' fees 1,909 6,458,849
-------------- --------------
Net assets applicable to shares
outstanding $161,554,191
--------------
--------------
Shares outstanding---no par value
(unlimited number of shares authorized) 8,339,261
--------------
--------------
PRICING OF SHARES
Net asset value, offering price, and
redemption price per share $19.37
--------------
--------------
ANALYSIS OF NET ASSETS
Excess of amounts received from
issuance of shares over amounts paid
on redemption of shares on account
of capital $117,050,931
Undistributed net realized gain on
sales of investments 21,937,151
Unrealized appreciation of investments 22,828,112
Undistributed net investment loss (262,003)
--------------
Net assets applicable to shares outstanding $161,554,191
--------------
--------------
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
Investment income:
Dividends $ 735,644
Interest 226,926
-------------
Total investment income 962,570
Expenses:
Investment advisory fee 1,215,125
Fees to unaffiliated trustees 9,448
-------------
Total expenses 1,224,573
-------------
Net investment loss (262,003)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 20,085,106
Net change in unrealized appreciation 2,731,886
-------------
Net realized and unrealized gain on investments 22,816,992
-------------
Net increase in net assets resulting from operations $22,554,989
-------------
-------------
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Six Months Ended
6/30/96 Year Ended
(unaudited) 12/31/95
----------------- ---------------
From operations:
Net investment loss $ (262,003) $ (674,681)
Net realized gain on sales of
investments 20,085,106 12,277,032
Net change in unrealized appreciation 2,731,886 12,856,224
------------- -------------
Net increase in net assets resulting
from operations 22,554,989 24,458,575
Distributions to shareholders from:
Net realized gains -- (9,995,455)
From share transactions:
Proceeds from shares sold 10,061,296 11,349,598
Reinvestment of capital gain
distributions -- 9,858,098
Payments for shares redeemed (45,961,566) (63,542,803)
------------- -------------
Net decrease in net assets resulting
from share transactions (35,900,270) (42,335,107)
------------- -------------
Total decrease in net assets (13,345,281) (27,871,987)
Net assets at beginning of period 174,899,472 202,771,459
------------- -------------
Net assets at end of period $161,554,191 $174,899,472
------------- -------------
------------- -------------
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------
Six Months
Ended 6/30/96 Years ended December 31
(unaudited) 1995 1994 1993 1992
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 16.79 $ 15.64 $ 17.83 $ 17.12 $ 12.67
--------- --------- --------- --------- ---------
Income from Investment
Operations
Net investment (loss) income (0.03) (0.06) (0.08) (0.09) (0.01)
Net realized and unrealized
gain (loss) on investments 2.61 2.21 (0.18) 3.94 5.37
--------- --------- --------- --------- ---------
Total from Investment
Operations 2.58 2.15 (0.26) 3.85 5.36
--------- --------- --------- --------- ---------
Less Distributions
Dividends from net
investment income -- -- -- -- --
Dividends from net realized
gains on investments -- (1.00) (1.93) (3.14) (0.91)
--------- --------- --------- --------- ---------
Total Distributions - (1.00) (1.93) (3.14) (0.91)
--------- --------- --------- --------- ---------
Net asset value at end of
period $ 19.37 $ 16.79 $ 15.64 $ 17.83 $ 17.12
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total Return 15.37% (b) 13.83% (1.15%) 22.85% 42.45%
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.51% (a) 1.51% 1.49% 1.48% 1.51%
Ratio of net investment
loss to average net
assets (0.32%)(a) (0.35%) (0.49%) (0.54%) (0.19%)
Portfolio turnover rate 122% (a) 71% 82% 104% 87%
Net assets, end of period
(in thousands) $161,554 $174,899 $202,771 $228,011 $172,385
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Note: Total return does not reflect the effect of any sales charges which may
have been previously charged.
(a) Ratios have been determined on an annualized basis.
(b) For the six months ended June 30, 1996.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
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.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
- - 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
The Portfolio's Investment Adviser is Skyline Asset Management, L.P.
("Adviser"). 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 the six months ended June 30, 1996 was $1,215,125. 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.
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 six months ended June 30, 1996, the Portfolio paid fees of $9,448 to its
unaffiliated trustees.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
Six months ended Year ended
6/30/96 12/31/95
------------------------------
Shares sold 555,085 690,848
Shares issued
in reinvestment
of dividends -- 593,863
---------- ----------
555,085 1,284,711
Less shares redeemed (2,634,154) (3,828,091)
---------- ----------
Net decrease in
shares outstanding (2,079,069) (2,543,380)
---------- ----------
---------- ----------
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the six
months ended June 30, 1996, are as follows:
Cost of purchases $95,134,676
Proceeds from sales 125,806,567
REPORT FOR THE SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
This report, including the unaudited 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.
SEMI-ANNUAL REPORT - JUNE 30, 1996
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SEMI-ANNUAL REPORT - JUNE 30, 1996
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SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
[LOGO]
311 South Wacker Dr.
Suite 4500
Chicago, Illinois 60606
fax 312.913.1980
telephone 312.913.0900
800.458.5222
<PAGE>
[LOGO]
SKYLINE SPECIAL EQUITIES II
INVESTING IN SMALL- TO MID-SIZED COMPANIES
- -------------------------------- STRATEGY
- Value orientation - low price/earnings
ratio-20% plus discount to the market
- Attention to growth - forecasted EPS
growth in the 10% to 20% range
- Focus on "neglected" companies - limited
Wall Street research coverage
- Market cap range of $400 million to $2
billion
JUNE 30, 1996
<PAGE>
LETTER FROM KENNETH S. KAILIN, PORTFOLIO MANAGER:
- --------------------------------------------------------------------------------
JULY 22, 1996
Dear Shareholder:
We are pleased to report the Portfolio posted a 12.6% return during the first
six months of 1996 and a 6.7% return for the June quarter. These results nicely
outpaced our two smaller stock market benchmarks, the Russell 2000 Index and the
Russell 2500 Index, as the accompanying performance table indicates. The one-
year returns also have been healthy in both an absolute and relative sense.
The economic outlook for the U.S. brightened somewhat during the quarter as a
result of increased consumer spending. This provided a healthy environment for
corporate profit growth and thus stock prices. In addition, strong stock market
returns during the last 18 months encouraged strong cash inflows into the U.S.
stock market. These inflows pressured portfolio managers to continue buying
equities, which also helped to keep stock prices rising in the quarter.
In terms of overall stock market performance, small company stock funds
generally performed modestly better than large company stock funds during the
last six months. This marks a distinct turn from the prior two years when larger
stocks outperformed smaller stocks. We are hopeful that this trend will continue
for reasons explained below. As for investment style differences, growth
managers achieved better returns than value managers in the June quarter,
although the performance differential appears more modest than recent quarters.
The two best performing small company stock market sectors in the second quarter
were energy due to better commodity pricing and the consumer sector, which
benefited from stronger consumer spending trends.
The Portfolio's strong performance during the quarter was generated from very
healthy returns from energy and consumer stocks. In addition, the Portfolio did
not experience severe underperformance from any particular industry sector. In
general, our stock selection was reasonably good during the quarter. Consumer
discretionary stocks rose 22% in the quarter and represented 15% of the
Portfolio at the end of June. Big gainers in this area included World Color
Press, Harman International Industries, Pier 1 Imports, Claire's Stores, and
Royal Caribbean Cruises. Energy stocks rose 23% in the quarter and accounted for
nearly 5% of the Portfolio at quarter's end.
While the U.S. stock market has become quite volatile recently, we are
optimistic about the outlook for our particular investment style. Based on a
number of relative valuation measures, we believe that the Russell 2000 Index is
quite inexpensive relative to the S&P 500 Index. Also, the stronger dollar and
weakness in European economies will likely be a drag on the earnings of large
multinational corporations. For these reasons, we are bullish on the prospects
for smaller U.S. stocks. In addition, a stronger U.S. economy should generate
better earnings growth for economically sensitive industries. These industries
tend to be widely held by value managers like ourselves. In summary, we are
hopeful the combination of good profit growth and low valuations will help our
investment style in future periods despite short term stock market swings.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE (%)(1)
- ---------------------------------------------------------------------------------------------------------------------------
CALENDAR YEARS
QTR2 YTD SINCE ----------------------------------
1996 1996 1 YR. 3 YRS. INCEPTION(2) 1995 1994 1993(2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES II 6.72 12.58 27.37 13.67 12.17 21.0 -1.5 10.1
RUSSELL 2500 4.16 10.26 24.16 16.12 15.07 31.7 -1.1 12.1
RUSSELL 2000 5.00 10.36 23.89 15.81 14.51 28.4 -1.8 13.8
</TABLE>
PORTFOLIO WEIGHTINGS
- --------------------------------------------------------------------------------
[PIE CHART]
Autos & Transportation 7.6%
Cash 5.7%
Other 3.8%
Utilities 2.5%
Consumer Discretionary 15.4%
Technology 10.4%
Consumer Staples 3.2%
Producer Durables 12.7%
Energy 4.8%
Materials & Processing 6.3%
Financial Services 18.8%
Health Care 8.8%
SECTOR PERFORMANCE
- --------------------------------------------------------------------------------
SPECIAL RUSSELL
EQUITIES II 2500
ENERGY 23.3% 13.5%
CONSUMER DISCRETIONARY 22.1 8.6
MATERIALS & PROCESSING 10.8 0.5
OTHER 7.7 2.6
TECHNOLOGY 5.9 8.6
FINANCIAL SERVICES 3.5 3.0
PRODUCER DURABLES 1.9 3.6
AUTOS & TRANSPORTATION 0.8 4.2
HEALTH CARE -0.9 -2.6
CONSUMER STAPLES -3.3 1.1
UTILITIES -4.8 4.6
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
SPECIAL
EQUITIES II RUSSELL 2500 RUSSELL 2000
P/E RATIO (MEDIAN) 16.0 22.6 23.8
PRICE/BOOK 2.48 2.48 2.45
PRICE/SALES 0.94 1.16 1.21
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 24.9% 18.0% 19.9%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $780 million $1.0 billion $500 million
PORTFOLIO VALUE $96 million $1,319 billion $655 billion
NUMBER OF HOLDINGS 41 2,500 2,000
- --------------------------------------------------------------------------------
TICKER SYMBOL: SPEQX
CUSIP #: 830833406
INITIAL INVESTMENT: $1,000
1-800-458-5222
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
NEWFIELD EXPLORATION COMPANY (NFX)
NFX is an independent oil and gas exploration company operating in the Gulf of
Mexico. Management has successfully grown production at a double-digit rate
since NFX became a public company in 1993. NFX employs the most advanced
technologies to find and exploit its gas reserves. Currently, NFX is benefiting
from strong gas prices, which will allow for increased investment in additional
wells. NFX is trading at a below average valuation with an outlook for strong
volume, cash flow, and earnings growth.
SIERRA HEALTH SERVICES, INC. (SIE)
SIE operates the dominant health maintenance organization (HMO) in Nevada and
also provides health care services in Texas, California, and other states. SIE
is well positioned for above average growth due to a number of factors including
membership enrollment. Strong member growth is being driven by conversions from
traditional health plans, expansion of new programs like Medicare HMO plans, and
population growth in Nevada. In addition, the stock is not well followed, is
undervalued relative to its peers, and is frequently mentioned as a takeover
candidate.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
TOP TEN HOLDINGS % OF NET ASSETS
- --------------------------------------------------------------------------------
HARMAN INTERNATIONAL INDUSTRIES, INC.
Producer of Audio Equipment 3.4%
FIRST BRANDS CORP.
Manufacturer of Consumer Products 3.2%
SIERRA HEALTH SERVICES, INC.
Operator of Health Maintenance Organizations 3.1%
FISHER SCIENTIFIC INTERNATIONAL INC.
Laboratory Equipment Supplier 3.0%
AGCO CORP.
Agriculture Equipment Producer 3.0%
WORLD COLOR PRESS, INC.
Commercial Printer 3.0%
BERG ELECTRONICS CORP.
Producer of Electronic Components 2.9%
GREENFIELD INDUSTRIES, INC.
Maker of Industrial Cutting Tools and Drill Bits 2.9%
CANADIAN NATIONAL RAILWAY CO.
Railroad Operator 2.9%
AMERICAN STANDARD CO.
Producer of Building Materials 2.9%
TOP TEN HOLDINGS 30.3%
(1) The performance for the one and three years ended June 30, 1996, and for
the period February 9, 1993 (inception) through June 30, 1996, is an
average annual total return calculation which 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.
The Russell 2500 Index is an unmanaged, market value weighted index
comprised of small- to mid-sized companies. The Russell 2000 Index is an
unmanaged, market value weighted index comprised of small-sized companies.
All figures take into account reinvested dividends. All indexes and
portfolio characteristics are compiled by Frank Russell Company.
(2) Return is calculated from the Portfolio's inception on February 9, 1993.
(3) Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small- and mid-sized companies, which tend to be more volatile and less liquid
than stocks of large companies.
Distributor: Funds Distributor, Inc.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
PORTFOLIO HOLDINGS as of June 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
Number
Of Shares Market Value
----------- --------------
COMMON STOCKS
AUTOS & TRANSPORTATION - 7.6%
AUTO RELATED - 4.7%
Borg-Warner Automotive, Inc. 63,000 $ 2,488,500
Echlin Inc. 52,700 1,996,012
--------------
4,484,512
RAILROAD - 2.9%
Canadian National Railway Co.(a) 151,700 2,787,488
--------------
TOTAL AUTOS & TRANSPORTATION 7,272,000
CONSUMER DISCRETIONARY - 15.4%
CONSUMER PRODUCTS/SERVICES - 7.7%
Harman International Industries, Inc. 66,900 3,294,825
Royal Caribbean Cruises Ltd. 77,300 2,203,050
Toro Co. (The) 56,200 1,861,625
--------------
7,359,500
PRINTING/PUBLISHING - 3.0%
World Color Press, Inc.(a) 112,300 2,849,613
RETAIL - 4.7%
Alberto-Culver Co., Class A shares 53,100 2,124,000
Pier 1 Imports, Inc. 161,950 2,409,006
--------------
4,533,006
--------------
TOTAL CONSUMER DISCRETIONARY 14,742,119
CONSUMER STAPLES - 3.2%
First Brands Corp. 113,200 3,056,400
ENERGY - 4.8%
Flores & Rucks, Inc.(a) 35,300 1,217,850
Newfield Exploration Company(a) 30,800 1,197,350
Nuevo Energy Co.(a) 67,300 2,170,425
--------------
TOTAL ENERGY 4,585,625
FINANCIAL SERVICES - 18.8%
LIFE INSURANCE - 2.0%
Reinsurance Group of America, Inc. 51,000 1,925,250
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
Number
Of Shares Market Value
----------- --------------
OTHER INSURANCE - 8.5%
CMAC Investment Corp. 37,300 $ 2,144,750
Horace Mann Educators Corp. 62,600 1,987,550
Paul Revere Corp. (The) 69,400 1,908,500
PennCorp Financial Group, Inc. 66,200 2,101,850
--------------
8,142,650
OTHER FINANCIAL - 8.3%
Advanta Corp., Class B shares 45,400 2,054,350
Finova Group, Inc. 38,800 1,891,500
Olympic Financial Ltd.(a) 98,200 2,258,600
United Companies Financial Corp. 49,300 1,676,200
--------------
7,880,650
--------------
TOTAL FINANCIAL SERVICES 17,948,550
HEALTH CARE - 8.8%
HEALTH CARE SERVICES - 3.1%
Sierra Health Services, Inc.(a) 94,900 2,989,350
MEDICAL EQUIPMENT/PRODUCTS - 5.7%
Fisher Scientific International Inc. 77,600 2,910,000
Sybron International Corp.(a) 101,200 2,530,000
--------------
5,440,000
--------------
TOTAL HEALTH CARE 8,429,350
MATERIALS & PROCESSING - 6.3%
BUILDING/CONSTRUCTION PRODUCTS - 2.9%
American Standard Co.(a) 84,000 2,772,000
STEEL/IRON - 3.4%
UCAR International Inc.(a) 58,100 2,418,413
WCI Steel, Inc.(a) 150,600 790,650
--------------
3,209,063
--------------
TOTAL MATERIALS & PROCESSING 5,981,063
PRODUCER DURABLES - 12.7%
CAPITAL GOODS - 7.7%
Applied Power Inc. 66,000 1,848,000
Belden Inc. 89,600 2,688,000
Greenfield Industries, Inc. 84,900 2,801,700
--------------
7,337,700
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
Number
Of Shares Market Value
----------- --------------
FARM EQUIPMENT - 3.0%
AGCO Corp. 103,800 $ 2,880,450
OFFICE FURNITURE - 2.0%
Herman Miller, Inc. 64,100 1,963,063
--------------
TOTAL PRODUCER DURABLES 12,181,213
TECHNOLOGY - 10.4%
Arrow Electronics, Inc.(a) 19,500 840,938
Berg Electronics Corp.(a) 118,300 2,809,625
DecisionOne Holdings Corp.(a) 103,000 2,446,250
Komag, Inc.(a) 87,800 2,315,725
Wyle Electronics 46,500 1,540,312
--------------
TOTAL TECHNOLOGY 9,952,850
UTILITIES - 2.5%
Enron Global Power & Pipelines Corp. 98,100 2,378,923
OTHER - 3.8%
REAL ESTATE INVESTMENT TRUSTS - 3.8%
Patriot American Hospitality, Inc. 57,900 1,715,288
Public Storage, Inc. 91,000 1,876,875
--------------
TOTAL OTHER 3,592,163
--------------
TOTAL COMMON STOCKS - 94.3%
(Cost: $78,002,364) 90,120,256
MONEY MARKET INSTRUMENTS(b)
Yield 5.12% to 5.19%
due November 1996 to March 1997
General Mills, Inc. 702,720
Warner-Lambert Co. 3,075,167
Wisconsin Electric Power Co. 737,204
--------------
TOTAL MONEY MARKET INSTRUMENTS - 4.7%
(Cost: $4,515,091) 4,515,091
--------------
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
Market Value
--------------
TOTAL INVESTMENTS - 99.0%
(Cost: $82,517,455) $ 94,635,347
OTHER ASSETS LESS LIABILITIES - 1.0% 963,187
---------------
NET ASSETS - 100.0% $ 95,598,534
--------------
--------------
(a) Non-income producing security.
(b) Variable rate securities. Interest rates are reset every seven days. Rates
shown are those in effect on June 30, 1996.
Based on cost of investments for federal income tax purposes of $82,517,455 on
June 30, 1996, net unrealized appreciation was $12,117,892, consisting of gross
unrealized appreciation of $13,849,770 and gross unrealized depreciation of
$1,731,878.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of June 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Cost: $82,517,455) $94,635,347
Receivable for:
Securities sold $4,066,250
Dividends and interest 114,713
Shares sold 56,274 4,237,237
-------------- --------------
Organization costs, net of accumulated
amortization of $13,010 9,231
--------------
Total assets 98,881,815
LIABILITIES & NET ASSETS
Payable for:
Securities purchased 3,099,571
Shares redeemed 48,187
Advisory fee 120,813
Trustees' fees 2,758
Organization costs 11,952 3,283,281
-------------- --------------
Net assets applicable to shares outstanding $ 95,598,534
--------------
--------------
Shares outstanding---no par value
(unlimited number of shares authorized) 7,524,376
--------------
--------------
PRICING OF SHARES
Net asset value, offering price, and
redemption price per share $12.71
--------------
--------------
ANALYSIS OF NET ASSETS
Excess of amounts received from
issuance of shares over amounts paid
on redemption of shares on account
of capital $74,121,724
Undistributed net realized gain on
sales of investments 9,407,752
Unrealized appreciation of investments 12,117,892
Undistributed net investment loss (48,834)
--------------
Net assets applicable to shares outstanding $95,598,534
--------------
--------------
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
STATEMENT OF OPERATIONS Six Months Ended June 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
Investment income:
Dividends $ 430,591
Interest 199,479
--------------
Total investment income 630,070
Expenses:
Investment advisory fee 702,359
Fees to unaffiliated trustees 9,448
Amortization of organization costs 1,352
--------------
Total expenses 713,159
--------------
Net investment loss (83,089)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 9,270,689
Net change in unrealized appreciation 1,738,624
--------------
Net realized and unrealized gain on investments 11,009,313
--------------
Net increase in net assets resulting from operations $10,926,224
--------------
--------------
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Six Months Ended
6/30/96 Year Ended
(unaudited) 12/31/95
-------------- --------------
From operations:
Net investment (loss) income $ (83,089) $ 464,802
Net realized gain on sales of
investments 9,270,689 6,706,516
Net change in unrealized appreciation 1,738,624 10,355,575
-------------- --------------
Net increase in net assets resulting
from operations 10,926,224 17,526,893
Distributions to shareholders from:
Net investment income -- (430,547)
Net realized gains -- (6,569,453)
-------------- --------------
Total Distributions -- (7,000,000)
From share transactions:
Proceeds from shares sold 7,907,094 15,771,709
Reinvestments of dividends
and capital gain distributions -- 6,866,829
Payments for shares redeemed (12,438,045) (43,600,025)
-------------- --------------
Net decrease in net assets resulting
from share transactions (4,530,951) (20,961,487)
-------------- --------------
Total increase (decrease) in net assets 6,395,273 (10,434,594)
Net assets at beginning of period 89,203,261 99,637,855
-------------- --------------
Net assets at end of period $95,598,534 $89,203,261
-------------- --------------
-------------- --------------
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------
Six Months Year Year For the Period
Ended 6/30/96 Ended Ended 2/9/93(a)-
(unaudited) 12/31/95 12/31/94 12/31/93
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.29 $ 10.14 $ 10.79 $ 10.00
-------- -------- -------- --------
Income from Investment
Operations
Net investment (loss) income (0.01) 0.06 0.02 0.01
Net realized and unrealized
gain (loss) on investments 1.43 2.06 (0.19) 1.00
-------- -------- -------- --------
Total from Investment
Operations 1.42 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 $ 12.71 $ 11.29 $ 10.14 $ 10.79
-------- -------- -------- --------
-------- -------- -------- --------
Total Return 12.58% (e) 20.95% (1.52%) 10.08% (c)
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.52% (b) 1.52% 1.51% 1.51% (b)
Ratio of net investment
(loss) income to
average net assets (0.18%)(b) 0.50% 0.22% (0.10%)(b)
Portfolio turnover rate 154% (b) 102% 82% 111% (b)
Net assets, end of period
(in thousands) $ 95,599 $ 89,203 $ 99,638 $ 58,608
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(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.
(e) For the six months ended June 30, 1996.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
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.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
- - 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
The Portfolio's Investment Adviser is Skyline Asset Management, L.P.
("Adviser"). 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 the six months ended June 30, 1996 was $702,359. 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 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 six months ended June 30, 1996, the Portfolio paid fees of $9,448 to its
unaffiliated trustees.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
Six months ended Year ended
6/30/96 12/31/95
---------------------------------
Shares sold 662,784 1,461,900
Shares issued
in reinvestment
of dividends -- 613,104
------------- -------------
662,784 2,075,004
Less shares redeemed (1,038,731) (3,998,270)
------------- -------------
Net decrease in
shares outstanding (375,947) (1,923,266)
------------- -------------
------------- -------------
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the six
months ended June 30, 1996 are as follows:
Cost of purchases $66,722,314
Proceeds from sales 66,555,459
REPORT FOR THE SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
This report, including the unaudited 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.
SEMI-ANNUAL REPORT - JUNE 30, 1996
<PAGE>
[LOGO]
311 South Wacker Dr.
Suite 4500
Chicago, Illinois 60606
fax 312.913.1980
telephone 312.913.0900
800.458.5222
