<PAGE>
[LOGO]
SKYLINE FUND
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
DECEMBER 31, 1996
<PAGE>
LETTER FROM WILLIAM M. DUTTON, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
January 31, 1997
Dear Shareholder:
Skyline Special Equities Portfolio showed a gain of 9.2% in the fourth quarter,
bringing the return for the year to 30.4%. The fourth quarter was the
Portfolio's third consecutive quarter of significant outperformance relative to
the Russell 2000 Index, which moved ahead 5.2% in the quarter and 16.5% for the
year. The Portfolio outperformed the market due to a favorable environment for
value investing, good sector allocation, and strong stock selection.
The net asset value closed the year at $18.16 per share, following a
distribution of $3.61 per share in mid-December. The distribution consisted of
$1.73 per share of long-term capital gain and $1.88 per share of short-term
gain.
MARKET REVIEW
The stock market showed a nice gain in the fourth quarter, as the economy
continued to show decent growth with little sign of inflation. Large stocks
provided the best returns, with the Standard & Poor's 500 Index delivering an
8.5% increase. Small stocks were up a more modest 5.2%, as measured by the
Russell 2000 Index. Within the small cap sector, the most noteworthy event in
the quarter was the difference in returns by investment style. Small cap growth
investing, which had showed superb returns early in the year, significantly
underperformed in the fourth quarter, with many small cap growth portfolios
showing losses for the period. In contrast, small cap value investing generally
had a very strong quarter, with most small cap value portfolios outperforming
the Russell 2000 Index. In our opinion, the outperformance of value-oriented
portfolios can be attributed to superior relative valuation. At the start of
the quarter, small cap value stocks were trading at historically low relative
valuation levels, while small cap growth stocks were trading at historically
high relative valuation levels. During the fourth quarter, while small cap
value stocks worked their way higher, many small cap growth stocks saw their
price/earnings multiples decline and their stock prices drop.
For the year, large cap stocks outperformed small cap stocks for the third
consecutive year, as the S&P 500 Index showed a gain of 23.3% compared to a gain
of 16.5% for the Russell 2000 Index. Within the small cap market, value
investing proved to be the best investment style for the year. Small cap value
managers were helped by a stronger economy in 1996, which benefited many of the
economic sectors in which they tend to invest. The economy began getting
stronger in the spring, with the consumer sector of the economy showing
particular strength, benefiting the auto, housing, and retail areas. Also, the
financial services sector, an area of focus for many value managers, was one of
the top performing sectors for 1996. In contrast, growth stock managers were
hurt by their focus on technology and health care companies, which showed sub-
par returns for 1996. Overall, most sectors of the
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
small cap market showed remarkably similar returns for the year, with the
exceptions of the financial services and energy sectors, which were up
significantly, and the health care and utilities sectors, which showed losses.
PORTFOLIO REVIEW
Skyline Special Equities Portfolio achieved a return of 9.2% in the fourth
quarter, nearly double the return of the Russell 2000 Index. The most important
factor in this outperformance was sector allocation. The Portfolio has heavy
weightings in financial stocks and economically sensitive stocks, areas of the
market that showed the best returns. And the Portfolio has light weightings in
health care, technology, and utilities, areas that performed less well during
the period.
For the full year, the Portfolio showed a gain of 30.4%, far exceeding the 16.5%
gain for the Russell 2000 Index. Again, sector allocation benefited the
Portfolio, which had solid weightings in energy and financial stocks, the top
performing sectors for the year, and low exposures to health care and utility
stocks, the poorest performing areas in the market. The stronger economy was
also a major positive for the Portfolio in 1996, as numerous consumer and
industrial stocks did well. Finally, good stock selection played a big role in
the superior performance, as the Portfolio showed better results than the
Russell 2000 Index in nearly every economic sector.
OUTLOOK
Although it is always difficult to predict the stock market, it seems to make
sense to be cautious after such an extended period of strong performance.
Corporate earnings are high and interest rates are low, leaving little room for
major improvement going forward. However, while the overall stock market is
high, we believe that small cap value stocks are very attractive on a relative
basis. Small cap stocks in general appear very inexpensive relative to large
cap stocks based on many measures. The P/E of the Russell 2000 Index, for
example, is currently lower than the P/E of the S&P 500 Index, which is an
unusual situation. Historically, small cap stocks perform well when they attain
this valuation level. Also, when looking at other measures, such as price/book
value, price/sales, and dividend yield, small cap stocks appear very attractive
relative to large cap stocks. Finally, compared to small cap growth stocks,
small cap value stocks remain inexpensive despite the upward price moves of the
fourth quarter. The key going forward will be the economy. A strong economy
should benefit small cap value investing and Skyline Special Equities Portfolio.
On a final note, the Skyline Fund Board of Trustees recently decided to close
Skyline Special Equities Portfolio to new investors when it reached $250 million
in assets, a level that was attained on January 30, 1997. Skyline Asset
Management, L.P., the Portfolio's adviser, manages over $600 million in small
cap assets, including Skyline
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
Special Equities Portfolio and separately managed institutional accounts. The
Board believes that it is in the best interest of the shareholders to limit
total assets under management at a relatively low level in order to maintain
flexibility in investing in small cap stocks. Of course, as an existing
shareholder, you may continue to add to your existing accounts and open new
accounts.
CHANGE IN VALUE OF A $10,000 INVESTMENT(1)
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
INITIAL
INVESTMENT 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----------------------------------------------------------------------------------------------
<S> <C> <C> <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 $30,929 $35,206 $45,897
Russell 2000 $10,000 $7,567 $ 9,449 $10,986 $ 8,843 $12,914 $15,294 $18,184 $17,582 $22,932 $26,715
S&P 500 $10,000 $8,794 $10,247 $13,469 $13,037 $17,018 $18,325 $20,158 $20,424 $28,087 $34,617
</TABLE>
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at the end of this section.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
Qtr4
1996 1 yr.
SPECIAL EQUITIES 9.23 30.37
RUSSELL 2000 5.20 16.49
S&P 500 8.46 23.25
Calendar Years
1996 1995 1994 1993 1992
SPECIAL EQUITIES 30.4 13.8 -1.2 22.9 42.5
RUSSELL 2000 16.5 28.4 -1.8 18.9 18.4
S&P 500 23.3 37.5 1.3 10.0 7.7
SECTOR WEIGHTINGS (DECEMBER 31, 1996)
- --------------------------------------------------------------------------------
[PIE CHART]
Autos & Transportation 12.1%
Cash 6.8%
Utilities 1.4%
Technology 6.1%
Consumer Discretionary 15.6%
Producer Durables 10.0%
Consumer Staples 1.3%
Materials & Processing 16.1%
Energy 6.4%
Health Care 5.0%
Financial Services 19.2%
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
- --------------------------------------------------------------------------------
Since
3 yrs. 5 yrs. Inception(2)
SPECIAL EQUITIES 13.62 20.74 17.02
RUSSELL 2000 13.68 15.64 10.67
S&P 500 19.75 15.26 13.67
Calendar Years
1991 1990 1989 1988 1987(2)
SPECIAL EQUITIES 47.4 -9.3 24.0 29.7 -16.9
RUSSELL 2000 46.1 -19.5 16.2 24.9 -24.3
S&P 500 30.6 -3.2 31.4 16.5 -12.0
SECTOR PERFORMANCE (DECEMBER 31, 1996)
- --------------------------------------------------------------------------------
SPECIAL RUSSELL
EQUITIES 2000
CONSUMER STAPLES 20.1% 9.8%
---------------------
ENERGY 17.3 21.8
---------------------
PRODUCER DURABLES 16.5 7.2
---------------------
TECHNOLOGY 15.7 4.6
---------------------
FINANCIAL SERVICES 13.6 12.8
---------------------
MATERIALS & PROCESSING 11.5 6.5
---------------------
UTILITIES 9.5 -2.8
---------------------
CONSUMER DISCRETIONARY 7.0 -3.1
---------------------
HEALTH CARE 3.7 -3.9
---------------------
OTHER 0.0 5.4
---------------------
AUTOS & TRANSPORTATION -3.0 6.7
---------------------
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
SPECIAL
EQUITIES RUSSELL 2000 S&P 500
P/E RATIO (MEDIAN) 16.6 22.2 19.4
PRICE/BOOK 2.19 2.50 3.42
PRICE/SALES 0.74 1.26 1.42
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 18.1% 20.4% 12.5%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $390 MILLION $580 MILLION $24 BILLION
PORTFOLIO VALUE $219 MILLION $694 BILLION $5,658 BILLION
NUMBER OF HOLDINGS 73 1,942 500
- --------------------------------------------------------------------------------
TICKER SYMBOL: SKSEX
CUSIP #: 830833208
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
LANDSTAR SYSTEM, INC. (LSTR)
Landstar is a leading truckload carrier in the U.S. Rather than owning its own
trucks and employing drivers, Landstar predominantly uses independent owner-
operators to service its shipping customers. Landstar is attracting numerous
owner-operators by offering them the opportunity to remain independent business
owners yet giving them access to more freight and lower operating costs through
Landstar's buying power. Shippers prefer using Landstar because they receive the
high service levels typical when dealing with a small business owner as well as
the access to sophisticated information systems and the lower costs of a large
company. Despite a proven business model that reduces earnings volatility but
provides growth opportunities, Landstar's stock sells at a significant valuation
discount to the market and its peers.
SUIZA FOODS CORP. (SWZA)
Suiza Foods is a leading manufacturer and distributor of fresh milk products,
refrigerated fruit drinks, and packaged ice products. The company has
capitalized on the highly fragmented nature of these businesses through an
active acquisition program. Acquiring companies at attractive prices and folding
them into Suiza's existing distribution network has led to rapid earnings
growth. Recent acquisitions bode well for continued strong earnings gains in
1997. Despite a strong earnings growth outlook, Suiza's stock is trading at a
substantial discount valuation to the market, making it an attractive
investment.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
TOP TEN HOLDINGS % OF NET ASSETS
- --------------------------------------------------------------------------------
INTERPOOL, INC.
Container leasing firm 2.2%
FURON COMPANY
Manufactuer of polymer-based industrial products 2.2%
ALLIED GROUP, INC.
Personal lines insurance company 2.1%
DELPHI FINANCIAL GROUP, INC.
Accident & health insurance firm 2.1%
AMERICAN HERITAGE LIFE INVESTMENT CORP.
Sells insurance via payroll-deduction plans 2.0%
PENNCORP FINANCIAL GROUP, INC.
Life & health insurance firm 1.9%
AMERON INTERNATIONAL CORP.
Supplier of concrete pipe/coatings 1.8%
DALLAS SEMICONDUCTOR CORP.
Electronic components supplier 1.8%
PIER 1 IMPORTS, INC.
Housewares stores operator 1.7%
INTERFACE, INC.
Carpet producer 1.7%
TOP TEN HOLDINGS 19.5%
NOTES TO PERFORMANCE
(1) The performance for the one, three, and five years ended December 31, 1996,
and for the period April 23, 1987 (inception) through December 31, 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.
Sources: Lipper Analytical Services & 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.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO HOLDINGS AS OF DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
------------------------- --------- ------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 12.1%
AUTO RELATED - 4.7%
Aftermarket Technology Corp.(a) Auto drive train products 122,500 $ 2,113,125
APS Holding Corp.(a) Auto parts distributor 201,000 3,115,500
Borg-Warner Automotive, Inc. OEM auto parts mfgr. 49,000 1,886,500
Excel Industries, Inc. OEM auto parts supplier 189,100 3,143,788
-----------
10,258,913
TRUCKING - 3.4%
Landstar System, Inc.(a) Truckload carrier 161,900 3,764,175
USFreightways Corp. Less than truckload carrier 137,400 3,769,913
-----------
7,534,088
OTHER TRANSPORTATION - 4.0%
Interpool, Inc. Container leasing firm 204,600 4,782,525
Kitty Hawk, Inc.(a) Air freight services 140,200 1,402,000
Pittston Burlington Group Air freight services 133,100 2,662,000
-----------
8,846,525
-----------
TOTAL AUTOS & TRANSPORTATION 26,639,526
CONSUMER DISCRETIONARY - 15.6%
COMMERCIAL SERVICES - 1.1%
CB Commercial Real Estate
Services Group Inc.(a) Real estate related services 123,100 2,462,000
CONSUMER PRODUCTS/SERVICES - 6.1%
Carmike Cinemas, Inc.(a) Cinema operator 102,500 2,600,938
Furniture Brands Intl, Inc.(a) Furniture manufacturer 253,400 3,547,600
Harman Intl Industries, Inc. Audio equipment 64,400 3,582,250
Libbey Inc. Glass tableware 133,300 3,715,738
-----------
13,446,526
RESTAURANTS - 1.7%
IHOP Corp.(a) Restaurant operator 159,800 3,775,275
RETAIL - 5.9%
Aaron Rents, Inc. Furniture store operator 219,600 2,607,750
Cole National Corp.(a) Gifts/eye care stores 104,200 2,735,250
Heilig-Meyers Co. Furniture store operator 47,900 778,375
Pier 1 Imports, Inc. Housewares stores 217,815 3,838,989
Tractor Supply Co.(a) Farm-related products 147,100 3,033,937
-----------
12,994,301
TEXTILES - 0.8%
Worldtex Inc.(a) Apparel/hosiery elastic yarn 190,900 1,694,237
-----------
TOTAL CONSUMER DISCRETIONARY 34,372,339
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------------- --------- ------------
<S> <C> <C> <C>
CONSUMER STAPLES - 1.3%
Suiza Foods Corp.(a) Dairy products 137,700 $2,788,425
ENERGY - 6.4%
EXPLORATION & PRODUCTION - 2.5%
Belden & Blake Corp.(a) Oil & gas producer 115,300 2,940,150
Comstock Resources, Inc.(a) Oil & gas producer 197,300 2,564,900
-----------
5,505,050
OTHER ENERGY - 3.9%
Aquila Gas Pipeline Corp. Gas pipeline operator 45,400 720,725
MarkWest Hydrocarbon, Inc.(a) Natural gas processing srvs 179,200 2,777,600
Willbros Group Inc.(a) Engineering/construction firm 202,800 1,977,300
Zeigler Coal Holding Co. Coal producer 144,300 3,084,413
-----------
8,560,038
-----------
TOTAL ENERGY 14,065,088
FINANCIAL SERVICES - 19.2%
BANKS/THRIFTS - 2.1%
PonceBank Puerto Rican bank 88,200 2,205,000
Sovereign Bancorp, Inc. New Jersey/PA thrift 174,600 2,291,625
-----------
4,496,625
LIFE INSURANCE - 3.7%
American Heritage Life
Investment Corp. Payroll-deduction plans 171,000 4,488,750
FBL Financial Group, Inc. Farm Bureau endorsed 143,500 3,569,562
-----------
8,058,312
OTHER INSURANCE - 10.2%
Allied Group, Inc. Personal lines insurance 144,550 4,715,944
Chartwell Re Corp. P & C reinsurance 88,400 2,364,700
Delphi Financial Group, Inc.(a) Accident & health insurance 157,640 4,650,380
Financial Security Assurance
Holdings Ltd. Municipal bond insurance 85,500 2,810,813
Horace Mann Educators P & C insurance 90,500 3,653,937
PennCorp Financial Group, Inc. Life & health insurance 117,600 4,233,600
-----------
22,429,374
OTHER FINANCIAL SERVICES - 3.2%
Legg Mason, Inc. Investment services 4,800 184,800
MoneyGram Payment
Systems(a) Wire transfer services 122,800 1,627,100
Raymond James Financial Investment services 85,100 2,563,638
Western National Corp. Retirement annuities 141,400 2,721,950
-----------
7,097,488
-----------
TOTAL FINANCIAL SERVICES 42,081,799
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------------- --------- ------------
<S> <C> <C> <C>
HEALTH CARE - 5.0%
HEALTH CARE SERVICES - 2.1%
Sierra Health Services, Inc.(a) Health maintenance organ. 88,800 $ 2,186,700
United Payors & United
Providers, Inc.(a) Health care intermediary 171,800 2,362,250
-----------
4,548,950
MEDICAL EQUIPMENT/PRODUCTS - 2.9%
Fisher Scientific Intl Inc. Laboratory equip. supplier 72,400 3,411,850
Vital Signs, Inc. Disposable medical
products 112,900 2,935,400
-----------
6,347,250
-----------
TOTAL HEALTH CARE 10,896,200
MATERIALS & PROCESSING - 16.1%
BUILDING/CONSTRUCTION PRODUCTS - 5.3%
Ameron International Corp. Concrete pipe/coatings 76,700 3,959,637
Dayton Superior Corp.(a) Concrete accessories 145,100 1,904,437
Interface, Inc. Carpet producer 187,800 3,779,475
Triangle Pacific Corp.(a) Building products mfgr. 87,300 2,100,657
-----------
11,744,206
INDUSTRIAL PRODUCTS - 3.4%
Brady (W.H.) Co. Misc. specialty products 108,200 2,664,425
Furon Company Polymer-based products 223,200 4,743,000
-----------
7,407,425
METAL FABRICATIONS - 1.6%
Citation Corp.(a) Castings manufacturer 285,100 2,922,275
Easco, Inc. Aluminum extrusions 67,000 510,875
-----------
3,433,150
PACKAGING - 2.2%
BWAY Corp.(a) Metal cans/containers 109,400 2,092,275
Shorewood Packaging Corp.(a) Consumer & software
products 143,900 2,806,050
-----------
4,898,325
SPECIALTY CHEMICALS - 3.6%
Lilly Industries, Inc. Industrial coatings/chemicals 170,800 3,117,100
Spartech Corp. Plastics 224,100 2,493,112
Synthetic Industries, Inc.(a) Industrial fibers 144,300 2,344,875
-----------
7,955,087
-----------
TOTAL MATERIALS & PROCESSING 35,438,193
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------------- --------- ------------
<S> <C> <C> <C>
PRODUCER DURABLES - 10.0%
MACHINERY - 5.8%
Alamo Group, Inc. Grounds maintenance equip. 135,000 $ 2,311,875
Bearings Inc. Industrial prods distributor 96,000 2,676,000
Binks-Sames Corp. Spray coating equip. 63,400 2,543,925
Brown & Sharpe Mfg. Co.(a) Metrology instruments 217,500 3,045,000
Goulds Pumps, Inc. Industrial pumps/motors 93,500 2,144,656
-----------
12,721,456
OTHER PRODUCER DURABLES - 4.2%
Applied Power Inc. Industrial prods mfgr. 76,300 3,023,388
Belden Inc. Wire & cable manufacturer 86,400 3,196,800
LSI Industries Inc. Lighting/graphics products 21,200 280,900
MagneTek, Inc.(a) Electrical products 203,400 2,618,775
-----------
9,119,863
-----------
TOTAL PRODUCER DURABLES 21,841,319
TECHNOLOGY - 6.1%
BancTec Inc.(a) Financial software/equip. 133,300 2,749,312
Berg Electronics Corp.(a) Electronic components 119,900 3,522,062
Dallas Semiconductor Corp. Electronic components 167,200 3,845,600
DecisionOne Holdings Corp.(a) Computer services 204,500 3,374,250
-----------
13,491,224
UTILITIES - 1.4%
Enron Global Power &
Pipelines Utility management 111,000 2,997,000
-----------
TOTAL COMMON STOCKS - 93.2%
(Cost: $176,354,707) 204,611,113
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
Market
Value
--------------
MONEY MARKET INSTRUMENTS(b)
Yield 5.47% to 5.55%
due January 1997 to August 1997
American Family Financial Services $ 2,068,408
General Mills, Inc. 132,500
Johnson Controls, Inc. 8,967,997
Pitney Bowes Credit Corp. 244,000
Sara Lee Corp. 4,513,540
Southwestern Bell Telephone Co. 494,418
Warner-Lambert Co. 1,940,128
Wisconsin Electric Power Corp. 213,710
------------
TOTAL MONEY MARKET INSTRUMENTS - 8.5%
(Cost: $18,574,701) 18,574,701
------------
TOTAL INVESTMENTS - 101.7%
(Cost: $194,929,408) 223,185,814
OTHER LIABILITIES LESS ASSETS - (1.7%) (3,705,438)
------------
NET ASSETS - 100.0% $219,480,376
------------
------------
(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, 1996.
Based on cost of investments for federal income tax purposes of $194,929,408 on
December 31, 1996, net unrealized appreciation was $28,256,406, consisting of
gross unrealized appreciation of $32,028,252 and gross unrealized depreciation
of $3,771,846.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
STATEMENT OF ASSETS & LIABILITIES AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $194,929,408) $223,185,814
Cash 78,669
Receivable for:
Securities sold $ 1,054,502
Dividends and interest 162,677
Shares sold 1,379,792 2,596,971
----------- ------------
Total assets 225,861,454
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 5,812,756
Shares redeemed 312,838
Advisory fee 254,493
Other 991 6,381,078
----------- ------------
Net assets applicable to shares
outstanding $219,480,376
------------
------------
Shares outstanding---no par value
(unlimited number of shares authorized) 12,087,286
------------
------------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 18.16
------------
-------------
ANALYSIS OF NET ASSETS
Paid-in capital $187,550,290
Undistributed net realized gain on
sales of investments 3,673,680
Unrealized appreciation of investments 28,256,406
------------
Net assets applicable to shares outstanding $219,480,376
------------
------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Investment income:
Dividends $ 1,490,417
Interest 499,478
-----------
Total investment income 1,989,895
Expenses:
Investment advisory fee 2,508,468
Fees to unaffiliated trustees 18,999
-----------
Total expenses 2,527,467
-----------
Net investment loss (537,572)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 36,985,981
Net change in unrealized appreciation 8,160,180
-----------
Net realized and unrealized gain on investments 45,146,161
-----------
Net increase in net assets resulting from operations $44,608,589
-----------
-----------
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Year Ended Year Ended
12/31/96 12/31/95
------------ -------------
From operations:
Net investment loss $ (537,572) $ (674,681)
Net realized gain on sales of
investments 36,985,981 12,277,032
Net change in unrealized appreciation 8,160,180 12,856,224
----------- ------------
Net increase in net assets resulting
from operations 44,608,589 24,458,575
Distributions to shareholders from
net realized gains (33,540,295) (9,995,455)
From share transactions:
Proceeds from shares sold 68,600,112 11,349,598
Reinvestment of capital gain
distributions 32,987,339 9,858,098
Payments for shares redeemed (60,788,388) (63,542,803)
Redemption in-kind (7,286,453) --
----------- ------------
Net increase (decrease) in net assets
resulting from share transactions 33,512,610 (42,335,107)
----------- ------------
Total increase (decrease) in net assets 44,580,904 (27,871,987)
Net assets at beginning of year 174,899,472 202,771,459
----------- ------------
Net assets at end of year $219,480,376 $174,899,472
----------- ------------
----------- ------------
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994 1993 1992
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of year $ 16.79 $ 15.64 $ 17.83 $ 17.12 $ 12.67
-------- -------- -------- -------- --------
Income from Investment
Operations
Net investment loss (0.04) (0.06) (0.08) (0.09) (0.01)
Net realized and unrealized
gain (loss) on investments 5.02 2.21 (0.18) 3.94 5.37
-------- -------- -------- -------- --------
Total from Investment
Operations 4.98 2.15 (0.26) 3.85 5.36
-------- -------- -------- -------- --------
Less distributions from net
realized gains on investments (3.61) (1.00) (1.93) (3.14) (0.91)
-------- -------- -------- -------- --------
Net asset value at end of year $ 18.16 $ 16.79 $ 15.64 $ 17.83 $ 17.12
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return 30.37% 13.83% (1.15%) 22.85% 42.45%
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.51% 1.51% 1.49% 1.48% 1.51%
Ratio of net investment
loss to average net
assets (0.32%) (0.35%) (0.49%) (0.54%) (0.19%)
Portfolio turnover rate 130% 71% 82% 104% 87%
Net assets, end of year
(in thousands) $219,480 $174,899 $202,771 $228,011 $172,385
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Average commission rate paid on stock transactions for the year ended December
31, 1996 was $0.0636 per share.
Note: Total return does not reflect the effect of any sales charges which may
have been previously charged.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<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. Variable rate demand notes are valued at cost which
equals market. 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 1996 net investment loss of $537,572 has been offset
against undistributed net realized gains at December 31, 1996.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
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 most 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 year ended December 31, 1996 was $2,508,468.
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.
Certain officers and trustees of the Fund are also officers, limited partners or
shareholders of limited partners 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, 1996, the Portfolio paid fees of $18,999 to its
unaffiliated trustees.
3
REDEMPTION IN-KIND
On September 30, 1996, a shareholder received a redemption in-kind for its
portion of the assets held by the Portfolio at that date. As a result,
investments with a market value of $6,777,575 and a cost basis of $5,691,096
were transferred to the former shareholder and $508,878 was paid to the
shareholder in cash.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
4
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
Year ended Year ended
12/31/96 12/31/95
--------------------------
Shares sold 3,541,731 690,848
Shares issued
in reinvestment
of dividends 1,876,407 593,863
---------- -----------
5,418,138 1,284,711
Less shares redeemed (3,385,587) (3,828,091)
Less redemption in-kind (363,595) --
---------- -----------
Net increase (decrease) in
shares outstanding 1,668,956 (2,543,380)
---------- -----------
---------- -----------
5
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1996, are as follows:
Cost of purchases $208,364,602
Proceeds from sales 208,553,497
Market value of shares
transferred (note 3) 6,777,575
ANNUAL REPORT - DECEMBER 31, 1996
<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, 1996, 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, 1996 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, 1996, 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 20, 1997
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
FEDERAL TAX STATUS OF 1996 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, 1996
- --------------------------------------------------------------------------------
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, 1996
<PAGE>
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<PAGE>
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<PAGE>
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ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
[LOGO]
SKYLINE FUND
311 South Wacker Dr.
Suite 4500
Chicago, Illinois 60606
fax 312.913.1980
telephone 312.913.0900
800.458.5222
<PAGE>
[LOGO]
SKYLINE FUND
SKYLINE SPECIAL EQUITIES II
INVESTING IN SMALL- TO MID-SIZED COMPANIES
Q4
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
DECEMBER 31, 1996
<PAGE>
LETTER FROM KENNETH S. KAILIN, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
January 31, 1997
Dear Shareholder:
We are very pleased to report that Skyline Special Equities II returned 26.6%
during 1996 and 10.2% in the fourth quarter. These results substantially beat
our smaller company benchmarks, the Russell 2000 Index and the Russell 2500
Index, as the accompanying table indicates. Furthermore, the Portfolio
considerably outperformed the average U.S. stock fund which was up 19.5% for the
year and 5.0% for the quarter. Clearly, 1996 was a very successful year by any
measure for the Portfolio. During the quarter, a distribution of $2.27 per
share was made, consisting of $2.26 in capital gains and $0.01 per share in
ordinary income. The net asset value at year end was $11.94 per share.
MARKET OVERVIEW
The U.S. economy during the past year experienced stable, slow growth with
modest inflation, low interest rates, high employment levels, and strong
consumer confidence. Many economists termed the environment a "Goldilocks
economy," not too hot and not too cold. This backdrop, combined with a stable
political environment, allowed the U.S. stock market to chalk up sizable gains
through the year.
Large blue chip stocks showed the best returns in 1996. The Dow Jones Industrial
Average's total return was 28.7% for the year, while the Russell 2000 Index's
total return was 16.5%. This focus by investors on large multi-national
companies seemed related to strong international earnings growth expectations.
Fear of a slowing U.S. economy may be one reason performance of smaller,
domestic companies was not as strong. Consistent with the annual results, small
stocks underperformed large stocks in the fourth quarter.
Smaller company value-oriented funds and smaller company growth-oriented funds
produced similar returns for the first nine months of the year. In the fourth
quarter, smaller company value stocks outperformed smaller company growth
stocks, primarily due to strong returns by financial stocks and weak
performances by health care stocks. This allowed smaller company value funds,
like Skyline, to produce better full year results compared to most smaller
company growth funds. Value managers were aided by another strong year for
financial stocks, while poor returns from health care stocks hurt growth
managers. Value funds were also boosted in the fourth quarter by strong returns
from economically sensitive stocks.
PORTFOLIO REVIEW
The question shareholders should be asking is, "Why was the Portfolio's
performance so strong despite smaller company stocks underperforming larger
stocks?" The answers are perhaps numerous, but can be most directly traced to
strong stock and industry sector selection.
Economically sensitive stocks, which include autos and transportation companies,
materials and processing companies, and producer durables companies, represented
a significant portion of the Portfolio during 1996. As a group, these cyclical
stocks performed reasonably well for both the year and the quarter. The
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
Portfolio actually outperformed each one of these sectors by a wide margin due
to successful stock selection. A slightly stronger domestic economy compared
with 1995 helped many of our industrial companies meaningfully increase
earnings. In addition, purchasing many of these companies at low valuations
throughout the year provided a real boost to the returns for both the quarter
and the full year.
In 1996, consumer discretionary stocks, like economically sensitive stocks,
showed a nice turnaround from 1995. The Portfolio's performance for that sector
beat the Russell 2500 Index's sector performance significantly and our holdings
in this area were meaningful. Niche retailers such as Claire's Stores, Pier 1
Imports, and Alberto-Culver reported strong earnings growth in a difficult
environment and helped the 1996 Portfolio performance. Unfortunately, consumer
stocks were not great performers in the fourth quarter due to concerns regarding
the Christmas selling season.
Other areas which contributed to the Portfolio's fine year included energy, real
estate investment trusts (REITs), and financial stocks. The Portfolio held
around 20% of its assets in financial stocks in 1996. Even though the
Portfolio's return from its financial stocks lagged the Russell 2500 Index's
return from that sector, the still impressive return helped the Portfolio during
the year.
The health care sector was the only area to produce negative returns for the
Portfolio. Technology stocks underperformed for the year but came back strongly
in the fourth quarter.
In summary, the Portfolio benefited from having large weightings in economically
sensitive stocks, consumer stocks, and financial stocks. Energy and REIT stocks
also helped, but represented smaller positions in the Portfolio. Beyond having
the Portfolio invested in most of the stronger performing industries, stock
selection played a key role in generating much of the excess returns.
OUTLOOK
Many investors are expressing nervousness over the large gains in the stock
market over the last two years. These concerns seem to focus on new highs being
reached so frequently by the Dow Jones Industrial Average over the course of the
past few months and about valuation measures such as the market's low dividend
yield and high price/earnings ratio. No one can deny that the stocks of large
company, blue chip corporations with billions of sales throughout the world have
performed incredibly well over the last two years. However, many investors fail
to realize that smaller company stocks have not appreciated nearly as much.
Therefore, we believe this portion of the market offers greater appreciation
potential than the market as a whole.
Smaller company stocks, while posting good absolute returns, have lagged large
company stocks for three straight years. In fact, the S&P 500 Index, a large
company benchmark, has outperformed the Russell 2000 Index, a small company
benchmark, by a compounded 25% during the 1994-1996 period. We feel this is
unlikely to continue much longer because, over long periods of time, smaller
company stocks have tended to outperform larger company stocks, although past
performance is not always a predictor of future results. The Portfolio focuses
on small- and medium-sized companies because these firms have historically grown
faster than larger more mature companies and are not as well known by most
investors.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
Clearly, the stock market in general has experienced two consecutive banner
years, and large double-digit returns will likely prove more difficult in 1997.
We expect a more emotional market environment, where stock selection and sector
weightings may prove critical. Our philosophy is to own a broad range of
undervalued, smaller company stocks in numerous industries. We do not try to
forecast when the market will rise or when the market will fall. Instead, we
diligently analyze the fundamentals and corporate outlook in detail before
purchasing. Then we only invest in those companies where we believe the
company's profits are likely to improve and the stock's valuation appears too
low. This Skyline approach has worked well for many years, and we remain
committed to this investment style.
CHANGE IN VALUE OF A $10,000 INVESTMENT(1)
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT SINCE INCEPTION
Initial
investment 1993 1994 1995 1996
------------------------------------------------
Special Equities II $10,000 $11,008 $10,841 $13,112 $16,599
S&P 400 $10,000 $11,174 $10,774 $14,108 $16,819
Russell 2000 $10,000 $11,376 $11,169 $14,346 $16,712
S&P 500 $10,000 $10,732 $10,874 $14,953 $18,431
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at the end of this section.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
Qtr4
1996 1 yr. 3 yrs.
SPECIAL EQUITIES II 10.20 26.60 14.67
RUSSELL 2000 5.20 16.49 13.68
RUSSELL 2500 5.57 19.03 15.76
SECTOR WEIGHTINGS (DECEMBER 31, 1996)
- --------------------------------------------------------------------------------
[PIE CHART]
Autos & Transportation 6.0%
Cash 5.5%
Other 4.9%
Consumer Discretionary 13.8%
Utilities 2.5%
Technology 11.3%
Consumer Staples 2.5%
Energy 4.4%
Producer Durables 17.1%
Financial Services 19.1%
Materials & Processing 5.0%
Health Care 7.9%
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Calendar Years
Since ----------------------------------------------
Inception(2) 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C> <C>
SPECIAL EQUITIES II 13.90 26.6 21.0 -1.5 10.1
RUSSELL 2000 14.10 16.5 28.4 -1.8 13.8
RUSSELL 2500 15.25 19.0 31.7 -1.1 12.1
</TABLE>
SECTOR PERFORMANCE (DECEMBER 31, 1996)
- --------------------------------------------------------------------------------
SPECIAL RUSSELL
EQUITIES II 2500
AUTOS & TRANSPORTATION 45.4% 7.0%
-------------------------------
OTHER 34.0 3.6
-------------------------------
PRODUCER DURABLES 16.2 7.1
-------------------------------
TECHNOLOGY 14.5 6.4
-------------------------------
MATERIALS & PROCESSING 12.4 6.0
-------------------------------
CONSUMER STAPLES 11.2 8.8
-------------------------------
UTILITIES 9.5 3.6
-------------------------------
ENERGY 9.3 18.5
-------------------------------
FINANCIAL SERVICES 7.0 13.1
-------------------------------
CONSUMER DISCRETIONARY 2.0 -3.1
-------------------------------
HEALTH CARE -6.6 -3.8
-------------------------------
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
SPECIAL
EQUITIES II RUSSELL 2000 RUSSELL 2500
P/E RATIO (MEDIAN) 16.6 22.2 21.7
PRICE/BOOK 2.48 2.50 2.59
PRICE/SALES 0.89 1.26 1.23
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 16.4% 20.4% 17.3%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $840 MILLION $580 MILLION $1.2 BILLION
PORTFOLIO VALUE $105 MILLION $694 BILLION $1,420 BILLION
NUMBER OF HOLDINGS 45 1,942 2,430
- --------------------------------------------------------------------------------
TICKER SYMBOL: SPEQX
CUSIP #: 830833406
INITIAL INVESTMENT: $1,000
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
CHAMPION ENTERPRISES, INC. (CHB)
CHB is a major producer of manufactured homes throughout the nation. Management
has targeted 20% average annual earnings growth during the next three years. The
combination of a strong industry outlook and acquisition growth should fuel the
profit gains. The quality of manufactured homes has improved dramatically and
they typically cost 50% less than traditionally built homes. The forecasted
growth relative to the present valuation makes it an attractive investment.
HUGHES SUPPLY INC. (HUG)
HUG operates nearly 300 construction and industrial wholesale distribution
outlets primarily in southeastern states. Management embarked on an aggressive
acquisition plan about four years ago resulting in over 30 acquisitions that
expanded product lines, geographic reach, and profit margins. Continued
expansion plans will likely boost the firm's profitability further. HUG is not
well followed by brokerage firms and appears undervalued.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
TOP TEN HOLDINGS % OF NET ASSETS
- --------------------------------------------------------------------------------
PIER 1 IMPORTS, INC.
Housewares stores operator 3.6%
FISHER SCIENTIFIC INTERNATIONAL INC.
Laboratory equipment supplier 3.4%
BERG ELECTRONICS CORP.
Producer of electronic components 3.2%
BELDEN INC.
Wire & cable producer 3.1%
GREENFIELD INDUSTRIES, INC.
Maker of cutting tools/drill bits 3.1%
FURNITURE BRANDS INTERNATIONAL, INC.
Furniture manufacturer 3.1%
WORLD COLOR PRESS, INC.
Commercial printer 3.0%
CHAMPION ENTERPRISES, INC.
Manufactured housing company 3.0%
USFREIGHTWAYS CORP.
Less than truckload carrier 2.9%
HARMAN INTERNATIONAL INDUSTRIES, INC.
Producer of audio equipment 2.8%
TOP TEN HOLDINGS 31.2%
NOTES TO PERFORMANCE
(1) The performance for the one and three years ended December 31, 1996, and
for the period February 9, 1993 (inception) through December 31, 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.
The Dow Jones Industrial Average is a price-weighted average of 30 actively
traded blue chip stocks. 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 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.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
PORTFOLIO HOLDINGS AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
--------------------------- --------- ------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 6.0%
AUTO RELATED - 1.8%
Borg-Warner Automotive, Inc. OEM auto parts mfgr. 25,600 $ 985,600
Echlin Inc. Auto parts manufacturer 28,000 885,500
-----------
1,871,100
RAILROAD - 1.3%
Canadian National Railway Railroad operator 38,000 1,444,000
TRUCKING - 2.9%
USFreightways Corp. Less than truckload carrier 110,000 3,018,125
-----------
TOTAL AUTOS & TRANSPORTATION 6,333,225
CONSUMER DISCRETIONARY - 13.8%
CONSUMER PRODUCTS/SERVICES - 7.2%
Furniture Brands Intl, Inc.(a) Furniture manufacturer 230,400 3,225,600
Harman Intl Industries, Inc. Audio equipment 52,300 2,909,187
Libbey Inc. Glass tableware 50,900 1,418,838
-----------
7,553,625
PRINTING/PUBLISHING - 3.0%
World Color Press, Inc.(a) Commercial printer 163,700 3,151,225
RETAIL - 3.6%
Pier 1 Imports, Inc. Housewares stores 216,550 3,816,694
-----------
TOTAL CONSUMER DISCRETIONARY 14,521,544
CONSUMER STAPLES - 2.5%
First Brands Corp. Consumer products 91,700 2,601,988
ENERGY - 4.4%
EXPLORATION & PRODUCTION - 4.4%
Forcenergy Inc.(a) Oil & gas producer 36,400 1,319,500
Santa Fe Energy Resources(a) Oil & gas producer 138,100 1,916,138
Seagull Energy Corp.(a) Oil & gas producer 63,500 1,397,000
-----------
TOTAL ENERGY 4,632,638
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
--------------------------- --------- ------------
<S> <C> <C> <C>
FINANCIAL SERVICES - 19.1%
BANKS/THRIFTS - 3.3%
Peoples Heritage Financial
Group, Inc.(a) Maine-based thrift 30,800 $ 862,400
Sovereign Bancorp, Inc. New Jersey/PA thrift 201,700 2,647,313
-----------
3,509,713
OTHER INSURANCE - 7.8%
CMAC Investment Corp. Mortgage insurance 78,600 2,888,550
Horace Mann Educators P & C insurance 67,700 2,733,387
PennCorp Financial Group Life & health insurance 72,600 2,613,600
-----------
8,235,537
OTHER FINANCIAL - 8.0%
Advanta Corp. Consumer finance 33,600 1,373,400
Olympic Financial Ltd.(a) Finance company 129,200 1,857,250
United Companies Financial Finance company 91,100 2,425,538
Western National Corp. Retirement annuities 140,400 2,702,700
-----------
8,358,888
-----------
TOTAL FINANCIAL SERVICES 20,104,138
HEALTH CARE - 7.9%
HEALTH CARE SERVICES - 4.5%
Integrated Health Services Sub-acute services 101,000 2,461,875
Sierra Health Services, Inc.(a) Health maintenance organ. 94,300 2,322,137
-----------
4,784,012
MEDICAL EQUIPMENT/PRODUCTS - 3.4%
Fisher Scientific Intl Inc. Laboratory equip. supplier 75,600 3,562,650
-----------
TOTAL HEALTH CARE 8,346,662
MATERIALS & PROCESSING - 5.0%
BUILDING/CONSTRUCTION PRODUCTS - 2.6%
Dal-Tile International Inc. Ceramic tile producer 64,500 1,314,187
Hughes Supply Inc. Construction/indust supplies 32,500 1,401,562
-----------
2,715,749
PACKAGING - 1.4%
Unisource Worldwide, Inc.(a) Paper/shipping supplies 72,100 1,460,025
STEEL/IRON - 1.0%
UCAR International Inc.(a) Steelmaking materials 29,600 1,113,700
-----------
TOTAL MATERIALS & PROCESSING 5,289,474
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
--------------------------- --------- ------------
<S> <C> <C> <C>
PRODUCER DURABLES - 17.1%
MACHINERY - 5.6%
AGCO Corp. Agriculture equip. producer 90,200 $ 2,581,975
Greenfield Industries, Inc. Cutting tools/drill bits 106,900 3,273,812
-----------
5,855,787
OFFICE FURNITURE - 1.1%
Herman Miller, Inc. Office furniture mfgr. 21,000 1,189,125
OTHER PRODUCER DURABLES - 10.4%
Applied Power Inc. Industrial prods mfgr. 66,000 2,615,250
Belden Inc. Wire & cable producer 89,600 3,315,200
Champion Enterprises, Inc.(a) Manufactured housing 160,400 3,127,800
Titan Wheel Intl, Inc. Off-road wheels & tires 151,600 1,932,900
-----------
10,991,150
-----------
TOTAL PRODUCER DURABLES 18,036,062
TECHNOLOGY - 11.3%
BancTec Inc.(a) Financial software/equip. 64,600 1,332,375
Berg Electronics Corp.(a) Electronic components 116,000 3,407,500
Coherent, Inc.(a) Laser manufacturer 49,400 2,087,150
DecisionOne Holdings Corp.(a) Computer services 144,100 2,377,650
Wyle Electronics Electronics distributor 67,800 2,678,100
-----------
TOTAL TECHNOLOGY 11,882,775
OTHER - 4.9%
REAL ESTATE INVESTMENT TRUSTS - 4.9%
Arden Realty Group, Inc. Office buildings REIT 47,400 1,315,350
Prentiss Properties Trust Office/industrial REIT 48,500 1,212,500
Public Storage, Inc. Storage warehouses REIT 83,000 2,573,000
-----------
TOTAL OTHER 5,100,850
UTILITIES - 2.5%
Enron Global Power &
Pipelines Utility management 98,100 2,648,700
-----------
TOTAL COMMON STOCKS - 94.5%
(Cost: $86,700,393) 99,498,056
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
Market
Value
--------------
MONEY MARKET INSTRUMENTS(b)
Yield 5.49% to 5.55%
due January 1997 to August 1997
American Family Financial Services $ 1,806,994
General Mills, Inc. 130,000
Johnson Controls, Inc. 4,405,621
Pitney Bowes Credit Corp. 170,000
Southwestern Bell Telephone Co. 54,790
Wisconsin Electric Power Corp. 116,348
--------------
TOTAL MONEY MARKET INSTRUMENTS - 6.3%
(Cost: $6,683,753) 6,683,753
--------------
TOTAL INVESTMENTS - 100.8%
(Cost: $93,384,146) 106,181,809
OTHER LIABILITIES LESS ASSETS - (0.8%) (849,226)
--------------
NET ASSETS - 100.0% $ 105,332,583
--------------
--------------
(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, 1996.
Based on cost of investments for federal income tax purposes of $93,384,146 on
December 31, 1996, net unrealized appreciation was $12,797,663, consisting of
gross unrealized appreciation of $14,657,839 and gross unrealized depreciation
of $1,860,176.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
STATEMENT OF ASSETS & LIABILITIES AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Cost: $93,384,146) $106,181,809
Cash 6,338
Receivable for:
Securities sold $ 436,089
Dividends and interest 127,493
Shares sold 589,467 1,153,049
------------
Organization costs, net of accumulated
amortization of $14,377 7,864
------------
Total assets 107,349,060
------------
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 1,551,902
Shares redeemed 321,826
Advisory fee 129,461
Trustees' fees 1,338
Organization costs 11,950 2,016,477
------------ ------------
Net assets applicable to shares
outstanding $105,332,583
------------
------------
Shares outstanding---no par value
(unlimited number of shares authorized) 8,819,701
------------
------------
PRICING OF SHARES
Net asset value, offering price, and
redemption price per share $11.94
------------
------------
ANALYSIS OF NET ASSETS
Paid-in capital $ 88,610,358
Undistributed net realized gain on
sales of investments 3,924,562
Unrealized appreciation of investments 12,797,663
------------
Net assets applicable to shares outstanding $105,332,583
------------
------------
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Investment income:
Dividends $ 857,838
Interest 356,767
------------
Total investment income 1,214,605
Expenses:
Investment advisory fee 1,428,303
Fees to unaffiliated trustees 18,999
Amortization of organization costs 2,719
------------
Total expenses 1,450,021
------------
Net investment loss (235,416)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 20,381,999
Net change in unrealized appreciation 2,418,395
------------
Net realized and unrealized gain on investments 22,800,394
------------
Net increase in net assets resulting from operations $ 22,564,978
------------
------------
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Year Ended Year Ended
12/31/96 12/31/95
------------- ------------
From operations:
Net investment (loss) income $ (235,416) $ 464,802
Net realized gain on sales of
investments 20,381,999 6,706,516
Net change in unrealized appreciation 2,418,395 10,355,575
------------ ------------
Net increase in net assets resulting
from operations 22,564,978 17,526,893
Distributions to shareholders from:
Net investment income (34,255) (430,547)
Net realized gains (16,359,084) (6,569,453)
------------ ------------
Total Distributions (16,393,339) (7,000,000)
From share transactions:
Proceeds from shares sold 20,849,640 15,771,709
Reinvestments of dividends
and capital gain distributions 16,109,334 6,866,829
Payments for shares redeemed (27,001,291) (43,600,025)
------------ ------------
Net increase (decrease) in net assets
resulting from share transactions 9,957,683 (20,961,487)
------------ ------------
Total increase (decrease) in net assets 16,129,322 (10,434,594)
Net assets at beginning of year 89,203,261 99,637,855
------------ ------------
Net assets at end of year $105,332,583 $ 89,203,261
------------ ------------
------------ ------------
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year Year For the Period
Ended Ended Ended 2/9/93(a)-
12/31/96 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 (0.02) 0.06 0.02 0.01
Net realized and unrealized
gain (loss) on investments 2.94 2.06 (0.19) 1.00
-------- -------- -------- --------
Total from Investment
Operations 2.92 2.12 (0.17) 1.01
-------- -------- -------- --------
Less distributions from:
Dividends from net
investment income (0.01) (0.06) (0.02) --
Dividends from net realized
gains on investments (2.26) (0.91) (0.46) (0.22)
-------- -------- -------- --------
Total Distributions (2.27) (0.97) (0.48) (0.22)
-------- -------- -------- --------
Net asset value at end of
period $ 11.94 $ 11.29 $ 10.14 $ 10.79
-------- -------- -------- --------
-------- -------- -------- --------
Total Return 26.60% 20.95% (1.52%) 10.08%(c)
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.53% 1.52% 1.51% 1.51%(b)
Ratio of net investment
(loss) income to
average net assets (0.24%) 0.50% 0.22% (0.10%)(b)
Portfolio turnover rate 145% 102% 82% 111%(b)
Net assets, end of period
(in thousands) $105,333 $ 89,203 $ 99,638 $ 58,608
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Average commission rate paid on stock transactions for the year ended December
31, 1996 was $0.0619 per share.
(a) Commencement of operations.
(b) Ratios have been determined on an annualized basis.
(c) For the period February 9, 1993 to December 31, 1993.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1996
<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. Variable rate demand notes are valued at cost which
equals market. 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.
- - RECLASSIFICATION - The 1996 net investment loss of $235,416 has been offset
against undistributed net realized gain at December 31, 1996.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
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 most 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 year ended December 31, 1996 was $1,428,303.
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.
Certain officers and trustees of the Fund are also officers, limited partners or
shareholders of limited partners 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, 1996, the Portfolio paid fees of $18,999 to its
unaffiliated trustees.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
Year ended Year ended
12/31/96 12/31/95
----------------------------------
Shares sold 1,685,216 1,461,900
Shares issued
in reinvestment
of dividends 1,398,376 613,104
------------- -------------
3,083,592 2,075,004
Less shares redeemed (2,164,214) (3,998,270)
------------- -------------
Net increase (decrease) in
shares outstanding 919,378 (1,923,266)
------------- -------------
------------- -------------
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1996 are as follows:
Cost of purchases $128,820,745
Proceeds from sales 131,058,600
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,
1996, 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 fiscal periods since 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, 1996 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, 1996, 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 fiscal
periods since 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 20, 1997
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
FEDERAL TAX STATUS OF 1996 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, 1996
- --------------------------------------------------------------------------------
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, 1996
<PAGE>
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ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
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SKYLINE FUND
311 South Wacker Dr.
Suite 4500
Chicago, Illinois 60606
fax 312.913.1980
telephone 312.913.0900
800.458.5222
