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SKYLINE FUNDS
SKYLINE SPECIAL EQUITIES II
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 $400 million to $2 billion
March 31, 1997
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LETTER FROM KENNETH S. KAILIN, PORTFOLIO MANAGER: (1)
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Dear Shareholder:
For the three-month period ending March 31, 1997, Skyline Special
Equities II declined 4.4%. This return, while unfortunate, did compare
favorably to a drop of 6.9% for the average small company mutual fund. This
marks the fifth consecutive quarter of besting the Russell 2000 Index.
Assessing the Fund's performance for the first quarter is somewhat
frustrating. Financial-related stocks, excluding real estate investment
trusts (REITs), represented about 20% of the Fund and generally showed
positive returns. In fact, four of the Fund's financial stocks were up about
10% or better in the quarter. In addition, technology and health care stocks
owned by the Fund produced quite satisfying relative returns in the quarter
overall. By comparison, these returns were strong since these two sectors
reported some of the biggest losses for small stock investors.
The positive results were offset by weak stock selection in a few
sectors. A number of our companies reported that their first-quarter results
would modestly disappoint investors. While these events typically occur from
time to time in most portfolios, during the first quarter we experienced more
miscues than normal. We believe that most of these companies still have a
very bright outlook for the remainder of the year and the stocks are
inexpensively priced. However, we felt that a few of these companies needed
to resolve long-term issues or carried too much uncertainty, and these stocks
have been sold.
While the stock market's recent volatility is disconcerting, we strongly
believe that, over a reasonable period of time, the price of an individual
stock will reflect the strength of the underlying company. After
underperforming for so long, small company stocks appear quite inexpensive
relative to large company stocks. However, the catalyst to create a more
favorable environment toward small stocks is not readily apparent. Despite
this, a good economic background and low relative valuation continue to point
toward better small company stock market returns in the future.
The key to almost all successful long term investment strategies is to
have a well defined, proven approach and remain disciplined within that
style. We remain confident in our approach and will strictly adhere to our
style of investing in small- to medium-sized companies, which are undervalued
relative to their past and future earnings ability.
/s/ Kenneth S. Kailin
PORTFOLIO CHARACTERISTICS (1)
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<TABLE>
<CAPTION>
SPECIAL
EQUITIES II RUSSELL 2000 RUSSELL 2500
<S> <C> <C> <C>
P/E RATIO (MEDIAN) 15.3 19.9 19.6
PRICE/BOOK 2.33 2.31 2.46
PRICE/SALES 0.93 1.19 1.18
EPS GROWTH CURRENT FISCAL 16.7% 20.6% 17.6%
YEAR AVERAGE
MARKET CAP $ WGHTD. MED. $670 million $580 million $1.2 billion
PORTFOLIO VALUE $107 million $651 billion $1,361 billion
NUMBER OF HOLDINGS 46 1,911 2,393
TICKER SYMBOL SPEQX
CUSIP # 830833406
INITIAL INVESTMENT $1,000
1-800-458-5222
</TABLE>
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<TABLE>
<CAPTION>
PERFORMANCE (%)(1)
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Qtr 1 Since Calendar Years
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1997 1 yr. 3 yrs. Inception(2) 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES II -4.44 14.68 13.55 11.79 26.6 21.0 -1.5 10.1
RUSSELL 2000 -5.17 5.11 12.69 11.76 16.5 28.4 -1.8 13.8
RUSSELL 2500 -3.35 8.68 15.31 13.34 19.0 31.7 -1.1 12.1
</TABLE>
SECTOR WEIGHTINGS (March 31, 1997)
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Autos & Transportation 5.8%
Technology 10.9%
Consumer Discretionary 18.6%
Producer Durables 11.1%
Consumer Staples 3.2%
Energy 4.7%
Materials & Processing 6.0%
Health Care 8.4%
Financial Services 24.6%
Cash 4.2%
Utilities 2.5%
SECTOR PERFORMANCE (First Quarter 1997)
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Special Russell
Equities II 2000
Health Care 8.2% -8.4%
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Utilities 3.2 -4.9
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Other 0.0 -1.4
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Technology -0.2 -19.1
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Financial Services -0.9 0.3
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Autos & Transportation -1.4 -1.0
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Consumer Discretionary -3.8 -4.4
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Energy -10.5 -10.2
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Consumer Staples -10.9 2.3
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Producer Durables -13.2 -5.0
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Materials & Processing -18.2 -2.6
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STOCK HIGHLIGHTS (3)
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AGCO Corporation (AG)
One of the largest manufacturers of agricultural equipment in the world, AG
is a consolidator of the industry, having made 14 acquisitions since 1990. As
a result, sales have grown from $314 million in 1992 to $2.3 billion in 1996.
Management expects meaningful cost savings, acquisitions, and a favorable
worldwide farm economy to help drive healthy earnings growth. AG's valuation
is quite compelling relative to its peers.
PRENTISS PROPERTIES TRUST (PP)
PP is a rapidly growing real estate investment trust (REIT) that owns 102
office and industrial properties in prosperous regions throughout the
country. A lack of commercial construction, combined with growing white
collar employment, should sustain improving rental rates and increasing
occupancy and provide PP with attractive acquisition opportunities.
Currently, PP is growing operating income in excess of 15% annually, enjoys a
6.5% dividend yield, and carries an attractive valuation.
TOP TEN HOLDINGS
% OF NET ASSETS
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AGCO Corp.
Agriculture equipment producer 3.3%
FIRST BRANDS CORP.
Consumer products 3.2%
WORLD COLOR PRESS, INC.
Commercial printer 3.1%
INTEGRATED HEALTH SERVICES, INC.
Provides sub-acute services 3.0%
CMAC INVESTMENT CORP.
Mortgage insurance 2.9%
HUGHES SUPPLY INC.
Construction/industrial supplies 2.8%
HORACE Mann Educators Corp.
Property & casualty insurance 2.8%
APPLIED POWER INC.
Industrial products manufacturer 2.6%
BORG-WARNER AUTOMOTIVE, INC.
OEM auto parts manufacturer 2.6%
HARMAN INTERNATIONAL INDUSTRIES, INC.
Audio equipment 2.5%
TOP TEN HOLDINGS 28.8%
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1
The performance for the one and three years ended March 31, 1997, and for
the period February 9, 1993 (inception) through March 31, 1997, is an
average annual total return calculation which 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.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. The Russell 2500 Index is an unmanaged,
market value weighted index comprised of small- to mid-sized companies. All
figures take into account reinvested dividends. All indexes and portfolio
characteristics are compiled by Frank Russell Company.
Sources: Lipper Analytical Services & Frank Russell Company.
2
Return is calculated from the Fund's inception on February 9, 1993.
3
Fund 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.
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[ Logo ]
311 South Wacker Dr.
Suite 4500
Chicago, Illinois 60606
fax 312.913.1980
telephone 312.913.0900
800.468.5222
