<PAGE>
As filed with the Securities and Exchange Commission on April 25, 1997
Securities Act Registration No. 33-11755
Investment Company Act Registration No. 811-5022
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
- -------------------------------------------------------------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 22 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 24 [X]
- --------------------------------------------------------------------------------
SKYLINE FUNDS-Registered Trademark-
(Registrant)
311 South Wacker Drive, Suite 4500, Chicago, Illinois 60606
Telephone Number: 312/913-0900
- -------------------------------------------------------------------------------
William M. Dutton Janet D. Olsen
Skyline Funds Bell, Boyd & Lloyd
311 South Wacker Drive, Suite 4500 Three First National Plaza, Suite 3300
Chicago, Illinois 60606 Chicago, Illinois 60602
(Agents for service)
- --------------------------------------------------------------------------------
Amending Parts A, B and C and filing Exhibits
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
-----
X on April 25, 1997 pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a)(1)
-----
on pursuant to paragraph (a)(1)
------ --------------
75 days after filing pursuant to paragraph (a)(2)
------
on pursuant to paragraph (a)(2) of rule 485
------ --------------
Registrant has previously elected to register pursuant to rule 24f-2 an
indefinite number of shares of beneficial interest of the following series:
Skyline Special Equities Portfolio and Skyline Special Equities II. Registrant
filed its Rule 24f-2 Notice for the fiscal year ended December 31, 1996 on
February 28, 1997.
- --------------------------------------------------------------------------------
<PAGE>
Item Location or caption*
- ------ -----------------------------------------------------------
Part A (Prospectus)
-------------------
1(a)-(b) Front cover
2(a) Expense Information
(b)-(c) Highlights
3(a) Financial Highlights
(b) Not applicable
(c)-(d) Management of Skyline - Performance
4(a)(i) Skyline and its Shares
(ii) Investment Objective and Policies; Risks; Investment
Restrictions
(b) Investment Objective and Policies; Investment Restrictions
(c) Risks
5(a) Management of Skyline
(b) Management of Skyline; Back cover; Expense Information
(c) Management of Skyline
(d) Not applicable
(e) Back cover
(f) Management of Skyline; Expense Information
(g) Management of Skyline
5A The information called for is contained in the annual
reports of Skyline Special Equities Portfolio and Skyline
Special Equities II
6(a) Skyline and its Shares
(b)-(d) Not applicable
(e) Skyline and its Shares
(f) Dividends and Distributions
(g) Taxes
(h) Not applicable
7 Purchasing Shares
(a) Back cover
(b) Purchasing Shares; Net Asset Value
(c) Not applicable
(d) Purchasing Shares
(e)-(g) Not applicable
8(a)-(d) Redeeming Shares
9 Not applicable
- -------------------
* References are to captions within the part of the
registration statement to which the particular item relates
except as otherwise indicated.
ii
<PAGE>
Item Location or caption*
- ------ -----------------------------------------------------------
Part B (Statement of Additional Information)
--------------------------------------------
10(a)&(b) Front cover
11 Table of contents
12 Skyline and the Portfolios
13(a)-(c) Investment Objective and Policies; Investment Restrictions
(d) Investment Objective and Policies
14(a)-(c) Management of Skyline
15(a) Not applicable
(b) Principal Shareholders
(c) Management of Skyline
16(a)(i) Investment Advisory Services
(ii) Management of Skyline
(iii) Investment Advisory Services
(b) Investment Advisory Services
(c)-(g) Not applicable
(h) General Information
(i) Not applicable
17(a)-(d) Portfolio Transactions and Brokerage
(e) Not applicable
18(a)&(b) Not applicable
19(a)-(c) Purchase and Redemption of Shares
20 Taxes
21(a)&(b) General Information - Distributor
(c) Not applicable
22(a) Not applicable
(b) Performance Information
23 Financial Statements
- -------------------
* References are to captions within the part of the
registration statement to which the particular item relates
except as otherwise indicated.
iii
<PAGE>
Item Location or caption*
- ------ -----------------------------------------------------------
Part C (Other Information)
----------------------------
24 Financial Statements and Exhibits
25 Persons Controlled by or Under Common Control With
Registrant
26 Number of Holders of Securities
27 Indemnification
28 Business and Other Connections of Investment Adviser
29 Principal Underwriters
30 Location of Accounts and Records
31 Management Services
32 Undertakings
- -------------------------
* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
iv
<PAGE>
SKYLINE FUNDS-REGISTERED TRADEMARK-
311 SOUTH WACKER DRIVE, SUITE 4500
CHICAGO, ILLINOIS 60606
IN ILLINOIS -- (312) 913-0900 COLLECT
OUTSIDE ILLINOIS -- (800) 458-5222 TOLL FREE
April 25, 1997
SKYLINE SPECIAL EQUITIES PORTFOLIO-REGISTERED TRADEMARK- and SKYLINE SPECIAL
EQUITIES II-REGISTERED TRADEMARK- seek maximum capital appreciation primarily
through investment in common stocks that the Adviser considers undervalued
relative to earnings, book value, or potential earnings growth.
SKYLINE SPECIAL EQUITIES PORTFOLIO emphasizes investments in small companies
whose outstanding shares have an aggregate market value of less than $700
million.
SKYLINE SPECIAL EQUITIES II emphasizes investments in small companies whose
outstanding shares have an aggregate market value of $400 million to $2 billion.
SPECIAL EQUITIES PORTFOLIO IS CLOSED TO NEW INVESTORS.
SEE "PURCHASING SHARES."
Skyline Special Equities Portfolio and Skyline Special Equities II are
"no-load" funds. There are no sales or redemption charges, and there are no
"12b-1" plans. Skyline Special Equities Portfolio and Skyline Special Equities
II are each a series of Skyline Funds.
This Prospectus is a concise statement of information you should know before
investing. Please retain it for future reference.
A Statement of Additional Information regarding Skyline Special Equities
Portfolio and Skyline Special Equities II, dated the same date as this
Prospectus, has been filed with the Securities and Exchange Commission and
(together with any supplement to it) is incorporated in this Prospectus by
reference. The Statement of Additional Information may be obtained without
charge by calling or writing Skyline at the telephone numbers or address shown
above. In addition, the Securities and Exchange Commission maintains a Website
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated in this Prospectus by reference, and other information
about Skyline Special Equities Portfolio and Skyline Special Equities II.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HIGHLIGHTS................................................................... 1
EXPENSE INFORMATION.......................................................... 3
FINANCIAL HIGHLIGHTS......................................................... 4
INVESTMENT OBJECTIVE AND POLICIES............................................ 7
RISKS........................................................................ 7
INVESTMENT RESTRICTIONS...................................................... 8
PURCHASING SHARES............................................................ 8
BY CHECK................................................................. 9
BY WIRE.................................................................. 9
PURCHASES THROUGH INTERMEDIARIES......................................... 10
GENERAL SHARE PURCHASE POLICIES.......................................... 10
REDEEMING SHARES............................................................. 11
BY MAIL.................................................................. 11
BY TELEPHONE............................................................. 11
GENERAL REDEMPTION POLICIES.............................................. 12
NET ASSET VALUE.............................................................. 12
SHAREHOLDER SERVICES......................................................... 13
SHAREHOLDER ACCOUNTS..................................................... 13
RETIREMENT PLANS......................................................... 13
EXCHANGE PRIVILEGE....................................................... 13
AUTOMATIC INVESTMENT PLAN................................................ 14
SYSTEMATIC WITHDRAWAL PLAN............................................... 15
DIVIDEND PURCHASE PLAN................................................... 15
DIVIDENDS AND DISTRIBUTIONS.................................................. 15
TAXES........................................................................ 16
MANAGEMENT OF SKYLINE........................................................ 17
THE TRUSTEES............................................................. 17
THE ADVISER.............................................................. 17
PORTFOLIO TRANSACTIONS................................................... 19
PERFORMANCE.............................................................. 19
SKYLINE AND ITS SHARES....................................................... 20
SHARES................................................................... 20
VOTING RIGHTS............................................................ 21
SHAREHOLDER INQUIRIES.................................................... 21
</TABLE>
<PAGE>
HIGHLIGHTS
SKYLINE SPECIAL EQUITIES PORTFOLIO and SKYLINE SPECIAL EQUITIES II are series
(each, a "Portfolio" and collectively, the "Portfolios") of Skyline Funds
("Skyline"). Each Portfolio is a "no-load" fund. There are no sales or
redemption charges.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE SKYLINE SPECIAL EQUITIES PORTFOLIO and
AND POLICIES SKYLINE SPECIAL EQUITIES II seek maximum
capital appreciation primarily through
investment in common stocks that the Adviser
considers undervalued relative to earnings,
book value, or potential earnings growth.
SKYLINE SPECIAL EQUITIES PORTFOLIO
emphasizes investments in small companies
whose outstanding shares have an aggregate
market value of less than $700 million.
SKYLINE SPECIAL EQUITIES II also emphasizes
investments in small companies, but whose
outstanding shares have an aggregate market
value of $400 million to $2 billion. (See
"Investment Objective and Policies.")
INVESTMENT RISKS Each Portfolio is designed for long-term
investors willing to accept more investment
risk and volatility than the stock market in
general.
MINIMUM PURCHASE $1,000 for initial investments and $100 for
subsequent investments. (See "Purchasing
Shares.")
DIVIDENDS AND CAPITAL Income dividends and capital gains, if any,
GAINS are distributed at least annually.
Distributions automatically are reinvested
in additional shares at net asset value
unless payment in cash is requested. (See
"Dividends and Distributions.")
REDEMPTION PRICE Current net asset value, without charge.
(See "Redeeming Shares.")
INVESTMENT ADVISER Skyline Asset Management, L.P. (the
"Adviser") is the investment adviser to
Skyline. The Adviser managed more than $774
million in assets as of March 31, 1997.
William M. Dutton and Kenneth S. Kailin are
the portfolio managers of Skyline Special
Equities Portfolio and Skyline Special
Equities II, respectively. Each of them
leads a team which is responsible
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
for the day-to-day management of their
respective portfolios. (See "Management of
Skyline -- The Adviser.")
EXPENSES Each Portfolio pays the Adviser a
comprehensive fee at an annual rate
declining from 1.50% of its average daily
net asset value. The Adviser pays out of its
fee the ordinary costs and expenses of each
Portfolio. (See "Management of Skyline --
THE ADVISER.")
DISTRIBUTOR Funds Distributor, Inc.
</TABLE>
2
<PAGE>
EXPENSE INFORMATION
The following table shows all fees paid by shareholders or assessed against
assets of the Portfolios:
<TABLE>
<CAPTION>
SKYLINE
SPECIAL SKYLINE
EQUITIES SPECIAL
PORTFOLIO EQUITIES II
----------- -----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)............................................ none none
Maximum Sales Load Imposed on Reinvested Dividends (as a
percentage of offering price).............................. none none
Deferred Sales Load......................................... none none
Redemption Fees (1)......................................... none none
Exchange Fees............................................... none none
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees (including operating expenses)(2)........... 1.50% 1.50%
12b-1 Fees.................................................. none none
Other Expenses.............................................. .01% .03%
----------- -----------
Total Operating Expenses.................................... 1.51% 1.53%
</TABLE>
- ------------------------
(1) A shareholder requesting payment of redemption proceeds by wire
must pay the cost of the wire transfer (currently $12). (See "Redeeming
Shares.")
(2) Under the advisory agreements, the Adviser pays all of the ordinary
operating expenses of each Portfolio, except the fees and expenses of
Skyline's non-interested trustees and the reimbursement of organization
costs. (See "Management of Skyline -- The Adviser.")
The purpose of the table is to assist the investor in understanding the
various costs and expenses that an investor in the Portfolios will bear,
directly or indirectly.
3
<PAGE>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period for each of the
Portfolios:
<TABLE>
<CAPTION>
SKYLINE
SPECIAL SKYLINE
EQUITIES SPECIAL
PORTFOLIO EQUITIES II
----------- -----------
<S> <C> <C>
1 year........................................................ $ 15 $ 16
3 years....................................................... 48 48
5 years....................................................... 82 83
10 years...................................................... 180 182
</TABLE>
The Example should not be considered a representation of past or future
expenses; the Portfolios' actual expenses and the annual rates of return may be
greater or less than those shown. Although information such as that shown in the
Example is useful in reviewing the Portfolios' expenses and in providing a basis
for comparison of these expenses with the expenses of other mutual funds, it
should not be used for comparison with other investments using different
assumptions or time periods.
FINANCIAL HIGHLIGHTS
The tables below reflect the results of the operations of each Portfolio on a
per-share basis for the periods indicated. The information presented has been
audited and reported on by Skyline's independent auditors. The tables should be
read in conjunction with the financial statements of Skyline Special Equities
Portfolio and Skyline Special Equities II, which may be obtained without charge
from Skyline upon request. The auditors' report and further information about
the performance of the Portfolios is contained in the Portfolios' Annual Reports
and the Statement of Additional Information, which may be obtained from Skyline
free of charge.
4
<PAGE>
SKYLINE SPECIAL EQUITIES PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995(A) 1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period............................... $ 16.79 $ 15.64 $ 17.83 $ 17.12 $ 12.67 $ 10.32 $ 11.49 $ 10.32
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment (loss) income......... (0.04) (0.06) (0.08) (0.09) (0.01) 0.01 0.10 0.13
Net realized and unrealized gains
(losses) on investments............. 5.02 2.21 (0.18) 3.94 5.37 4.74 (1.17) 2.33
--------- --------- --------- --------- --------- --------- --------- ---------
Total from Investment Operations..... 4.98 2.15 (0.26) 3.85 5.36 4.75 (1.07) 2.46
--------- --------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment
income.............................. -- -- -- -- -- (0.01) (0.10) (0.13)
Dividends from net realized gains on
investments......................... (3.61) (1.00) (1.93) (3.14) (0.91) (2.39) -- (1.16)
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS................ (3.61) (1.00) (1.93) (3.14) (0.91) (2.40) (0.10) (1.29)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value at end of period....... $ 18.16 $ 16.79 $ 15.64 $ 17.83 $ 17.12 $ 12.67 $ 10.32 $ 11.49
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (d)....................... 30.37% 13.83% (1.15%) 22.85% 42.45% 47.28% (9.28%) 23.98%
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets............................... 1.51% 1.51% 1.49% 1.48% 1.51% 1.55% 1.59% 1.60%
Ratio of net investment (loss) income
to average net assets................ (.32%) (0.35%) (0.49%) (0.54%) (0.19%) 0.09% 0.95% 1.30%
Portfolio turnover rate................ 130% 71% 82% 104% 87% 104% 98% 90%
Net assets at end of period (in
thousands)........................... $ 219,480 $ 174,899 $ 202,771 $ 228,011 $ 172,385 $ 37,495 $ 22,154 $ 21,056
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
APRIL 23,
1987(B) TO
DECEMBER 31,
1988 1987
--------- -------------
<S> <C> <C>
Net asset value at beginning of
period............................... $ 7.99 $ 9.61
--------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net investment (loss) income......... 0.05 0.01
Net realized and unrealized gains
(losses) on investments............. 2.33 (1.63)
--------- -------------
Total from Investment Operations..... 2.38 (1.62)
--------- -------------
LESS DISTRIBUTIONS
Dividends from net investment
income.............................. (0.05) --
Dividends from net realized gains on
investments......................... -- --
--------- -------------
TOTAL DISTRIBUTIONS................ (0.05) --
--------- -------------
Net asset value at end of period....... $ 10.32 $ 7.99
--------- -------------
--------- -------------
TOTAL RETURN (d)....................... 29.79% (16.86%)(c)
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets............................... 1.70% 1.60%(e)(f)
Ratio of net investment (loss) income
to average net assets................ 0.61% 0.20%(e)(f)
Portfolio turnover rate................ 68% 173%(e)
Net assets at end of period (in
thousands)........................... $ 11,498 $ 6,605
--------- -------------
--------- -------------
</TABLE>
- ------------------------
See "Notes to Financial Highlights" on page 5.
5
<PAGE>
SKYLINE SPECIAL EQUITIES II
<TABLE>
<CAPTION>
FEBRUARY
9,
1993 (B)
YEAR ENDED DECEMBER 31, TO
-------------------------------- DECEMBER
1996 1995(A) 1994 31, 1993
--------- --------- ---------- ---------
<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
gains (losses) on
investments.................... 2.94 2.06 (0.19) 1.00
--------- --------- ---------- ---------
Total from Investment
Operations..................... 2.92 2.12 (0.17) 1.01
--------- --------- ---------- ---------
LESS DISTRIBUTIONS
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)
Return of capital distribution -- -- --(h) --
--------- --------- ---------- ---------
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%(i)
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets.......................... 1.53% 1.52% 1.51% 1.51%(e)
Ratio of net investment (loss)
income to average net assets.... (0.24%) 0.50% 0.22% (0.10)%(e)
Portfolio turnover rate........... 145% 102% % 82 111%(e)
Net assets at end of period (in
thousands)...................... $ 105,333 $ 89,203 $ 99,638 $58,608
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
NOTES TO FINANCIAL HIGHLIGHTS:
During 1996, the average brokerage commissions paid per share of stock bought or
sold in a transaction in which a commission was paid were $0.0636 and $0.0619
for Skyline Special Equities Portfolio and Skyline Special Equities II,
respectively.
(a) Effective September 1, 1995, Skyline Asset Management, L.P. became the
investment adviser to each of the Portfolios.
(b) Commencement of operations.
(c) For the period April 23, 1987 to December 31, 1987.
(d) Total return for Skyline Special Equities Portfolio does not reflect the
effect of any sales charges which may have been previously charged.
(e) Ratios have been determined on an annualized basis.
(f) During the period from April 23, 1987 through December 31, 1987, fees
totaling $10,159 were reimbursed to the Skyline Special Equities Portfolio
or waived by the Portfolio's previous investment adviser. Absent the
foregoing, the ratio of expenses to average net assets would have been
1.88%, and the ratio of net investment loss to average net assets would have
been (.08%).
(h) Distributions were less than $.01 per share.
(i) For the period February 9, 1993 to December 31, 1993.
6
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Although SKYLINE SPECIAL EQUITIES PORTFOLIO and SKYLINE SPECIAL EQUITIES II
have the same general investment objective and follow the same investment
strategy, the Portfolios do differ in the size of the companies in which they
invest. Each Portfolio seeks maximum capital appreciation primarily through
investment in common stocks that the Adviser considers undervalued relative to
earnings, book value, or potential earnings growth. Companies in which the
Portfolios invest generally fall into one of the following three categories:
1. A company that the Adviser believes will achieve above-average
growth in earnings, but that is selling at a price/earnings ratio below
the average for the overall stock market.
2. A company that has experienced problems leading to a depressed
stock price where the Adviser believes that there is a reasonable
likelihood that the company's operations will improve.
3. A company that does not fall into the above categories, but
because of special circumstances appears undervalued and, consequently, offers
potential for appreciation.
SKYLINE SPECIAL EQUITIES PORTFOLIO emphasizes investments in small companies
whose outstanding shares have an aggregate market value of less than $700
million; SKYLINE SPECIAL EQUITIES II emphasizes investments in small companies
whose outstanding shares have an aggregate market value of $400 million to $2
billion.
Each Portfolio is ordinarily substantially fully invested, and under normal
market conditions, at least 65% of the assets of each Portfolio will be invested
in common stocks. In management of cash receipts or liquidity for anticipated
redemptions, each Portfolio may invest without limitation in high-quality
fixed-income securities or hold assets in cash or cash equivalents.
RISKS
Because of the Portfolios' concentration in stocks of small companies, which
tend to be more volatile and less liquid than stocks of larger companies,
investment in the Portfolios may involve an above-average degree of risk. Small
companies, as compared to larger companies, may have a shorter history of
operations, may not have as great an ability to raise additional capital, may
have a less diversified product line making them susceptible to market pressure,
and may have a smaller public market for their securities. However, the
Portfolios attempt to minimize risk through
7
<PAGE>
portfolio diversification and the use of a stock selection strategy that
emphasizes undervalued common stocks, many of which already reflect a lower
price.
There can be no assurance that a Portfolio's investment objective will be
achieved. Each Portfolio's investment objective and policies may be changed by
Skyline's board of trustees without shareholder approval. However, shareholder
approval is required for changes in a Portfolio's fundamental investment
restrictions. Any change in a Portfolio's investment objective might result in
that Portfolio having an investment objective that differs from the investment
objective a shareholder considered appropriate when investing.
INVESTMENT RESTRICTIONS
Skyline has adopted for each Portfolio the following investment restrictions,
among others, that may be changed only with the approval of a majority of the
outstanding shares of that Portfolio as defined in the Investment Company Act of
1940. A Portfolio may not: (1) invest more than 5% of its assets (valued at the
time of investment) in the securities of any single issuer, excluding government
obligations; (2) invest in a security if, as a result of such investment, the
Portfolio would hold more than 10% (measured at the time of investment) of the
outstanding voting securities of the issuer of such security; or (3) invest more
than 5% of its assets ( valued at the time of investment) in the securities of
an issuer with less than three years operating history (including predecessors).
All of the investment restrictions for each Portfolio are stated in the
Statement of Additional Information.
PURCHASING SHARES
SKYLINE SPECIAL EQUITIES PORTFOLIO CLOSED ON JANUARY 30, 1997, TO INVESTMENT
BY NEW INVESTORS. However, persons owning shares of Skyline Special Equities
Portfolio as of January 30, 1997 (the "Closing Date"), may continue to add to
their accounts. In addition, the following persons may continue to open new
accounts after the Closing Date: (i) persons owning shares of the Portfolio as
of the Closing Date; (ii) clients of any financial advisor or planner who has
$250,000 or more of client assets invested in the Portfolio as of the Closing
Date; (iii) clients of Mesirow Asset Management, Inc., Skyline's former
investment adviser, and Mesirow Financial, Inc., Skyline's former distributor;
(iv) Skyline's trustees and members of their immediate families and the
Adviser's employees and members of their immediate families; (v) retirement plan
accounts (including ERISA accounts and IRAs) for the Adviser's employees, and
Skyline's trustees, and members of their immediate families; (vi) retirement
plans sponsored by the Adviser or Affiliated Managers Group, Inc., the general
partner of the
8
<PAGE>
Adviser, in which the Adviser's employees are eligible to participate; (vii)
members of Skyline Growth Fund, L.L.C., a private investment company managed by
the Adviser; and (viii) persons who are transferring or rolling over into a
Skyline Fund IRA assets from an employee benefit plan through which they held
shares of the Portfolio, or investing part or all of the proceeds of a
distribution from a plan through which the person held shares of the Portfolio
which does not permit transfers or rollovers. IF YOU HAVE QUESTIONS ABOUT YOUR
ELIGIBILITY TO PURCHASE SHARES OF THE PORTFOLIO, CALL SKYLINE AT (312) 913-0900
OR (800) 458-5222. Purchases of shares of Skyline Special Equities II are not
affected by this restriction.
BY CHECK. Shares of the Portfolios may be purchased by completing a share
purchase application and forwarding it, together with a check for the
investment, directly to SKYLINE FUNDS C/O FIRSTAR TRUST COMPANY, P.O. BOX 701,
MILWAUKEE WI 53201 or to the Distributor or an authorized broker-dealer who is
responsible for promptly delivering the application and initial investment to
Skyline. The transfer agent is unable to accept third party checks both on
initial and subsequent share purchases.
The purchase price of shares in each Portfolio is the net asset value per
share next computed after receipt by Skyline (from the Distributor or an
authorized broker-dealer or directly from a shareholder) of an order completed
in accordance with the instructions on the account application. Your order must
be received by Skyline before the close of regular session trading on the New
York Stock Exchange (currently 3:00 p.m., central time) to receive the net asset
value calculated on that day. (See "Net Asset Value"). All purchases must be
made in U.S. dollars and checks must be drawn on U.S. banks.
Should an order to purchase shares of a Portfolio be canceled because a
shareholder's check does not clear, the shareholder will be responsible for any
resulting loss incurred by that Portfolio. A charge (currently $20) will be
assessed for any returned check.
DO NOT mail letters by overnight courier to the Post Office Box address.
Correspondence mailed by overnight courier should be sent to Firstar Trust
Company, Third Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202.
BY WIRE. To purchase shares of Skyline by Federal wire transfer, please call
Skyline at (800) 458-5222 for instructions. To open a new account by wire,
Skyline requires that an application form be faxed to it prior to receipt of the
wire. Investors must then promptly mail the original application form to Skyline
at Firstar Trust Company, P.O. Box 701, Milwaukee WI 53201. No account services
will be established until the completed application has been received by
Skyline.
9
<PAGE>
PURCHASES THROUGH INTERMEDIARIES. A shareholder may also purchase shares by
giving instructions by telephone to purchase shares (including the shareholder's
name and amount to be invested) to an authorized broker-dealer and instructing
the broker-dealer to wire transfer the funds for the shareholder's account.
Funds transferred by wire in this manner will be considered to be invested upon
receipt of the order by Skyline. Funds may be invested in this manner only
through an authorized broker-dealer. Any questions regarding this method of
investment may be answered by calling (312) 913-0900 or (800) 458-5222.
You may also purchase (or redeem) shares through investment dealers, banks, or
other institutions. However, these institutions may charge for their services or
place limitations on the extent to which you may use the services offered by
Skyline. Skyline does not impose any charges or limitations (other than nominal
charges for wire transfer, returned check, and similar items, as described in
this Prospectus) if you purchase (or redeem) shares directly from the
Distributor.
Some financial institutions that maintain nominee accounts with Skyline for
their clients for whom they hold shares of a Portfolio charge an annual fee of
up to .35% of the average net assets held in such accounts for accounting,
servicing, and distribution services they provide with respect to the underlying
shares of a Portfolio. Such fees are paid by the Adviser.
GENERAL SHARE PURCHASE POLICIES. The minimum initial investment to open an
account is $1,000, and subsequent investments must be at least $100. The minimum
initial investment to open an account for a spousal IRA (established for a
nonworking spouse) is $250. A Social Security or Taxpayer Identification Number
must be supplied and certified on the account application form before an account
can be established. Skyline may be required to withhold Federal income tax at a
rate of 31% ("backup withholding") from dividend payments and redemption
proceeds if a shareholder fails to furnish Skyline with the shareholder's
correct Social Security or Taxpayer Identification Number.
Skyline reserves the right to reject purchase orders under circumstances or in
amounts considered disadvantageous to existing shareholders. Skyline believes
that frequent purchases and redemptions of Portfolio shares by investors
utilizing market-timing strategies adversely affect the Portfolios. Skyline
therefore intends to reject purchase orders from investors identified by Skyline
as market-timers.
Generally, Skyline does not issue share certificates representing shares,
although share certificates in full share amounts will be furnished upon a
shareholder's written request. Fractional shares, if any, will be carried on
Skyline's books without issuance of certificates.
10
<PAGE>
REDEEMING SHARES
BY MAIL. Shareholders of each Portfolio may redeem their shares at the net
asset value next determined after the request is received by Skyline. Your
redemption request in proper form must be received by Skyline before the close
of regular session trading on the New York Stock Exchange (currently 3:00 p.m.,
central time) to receive the net asset value calculated on that day. (See "Net
Asset Value.") To redeem shares, a written request must be received by Skyline
or telephone authorization in proper form must be received by Skyline or be on
file with Skyline. A written request for redemption must be signed by all
persons in whose names the shares are registered. Redemption requests received
by facsimile transmission or other electronic means will not be accepted.
Signatures must conform exactly to the account registration.
DO NOT mail letters by overnight courier to the Post Office Box address.
Correspondence mailed by overnight courier should be sent to Firstar Trust
Company, Third Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202.
A signature guarantee is required on a written redemption request if (i) the
redemption proceeds are to be sent to a bank or brokerage account not previously
authorized by the shareholder in accordance with the instructions on the account
application, (ii) the proceeds of the requested redemption would be more than
$10,000, or (iii) THE ADDRESS OF RECORD HAS CHANGED WITHIN THE LAST 60 DAYS. The
signature guarantor must be a bank, member firm of a national securities
exchange, savings and loan association, credit union or other entity authorized
by state law to guarantee signatures. A NOTARY PUBLIC IS NOT AN ACCEPTABLE
GUARANTOR. Additional documentary evidence of authority is required in the event
redemption is requested by a corporation, partnership, trust, fiduciary,
executor, or administrator. CHECKS TO THIRD PARTIES OTHER THAN A BANK OR
BROKERAGE ACCOUNT AS AUTHORIZED ABOVE ARE NOT PERMITTED. Redemption checks will
not be forwarded if the redeeming shareholder moves. The redemption request
should also indicate the change of address and include a signature guarantee.
BY TELEPHONE. Telephone redemptions can be authorized on the account
application. If telephone redemptions are so authorized, Skyline will honor
requests by telephone at (312) 913-0900 or (800) 458-5222. Reasonable procedures
are used to confirm that instructions received by telephone are genuine. Such
procedures include requesting personal identification information that appears
on the purchase application and recording the conversation. You will bear the
risk of any loss that might result from a fraudulent instruction, although
Skyline may bear such risk if reasonable procedures were not used. To reduce the
risk of a fraudulent instruction, proceeds of telephone redemptions may be sent
only to the shareholder's
11
<PAGE>
address of record or to a bank or brokerage account designated by the
shareholder, in writing, on the purchase application or in a letter with the
signature(s) guaranteed. Skyline reserves the right to record all telephone
redemption requests. You may not redeem by telephone shares held in an IRA
account.
GENERAL REDEMPTION POLICIES. The redemption price per share is the net asset
value next determined after receipt of the redemption request, which may be more
or less than the shareholder's cost depending upon the value of the Portfolio's
investment securities at the time of redemption. (See "Net Asset Value.") There
is no charge for a redemption, but an authorized broker-dealer may charge a fee
for this service. A redemption order received from a broker-dealer must be at
least $250 unless the entire account is being redeemed.
Payment for shares redeemed is made by check or wire. Payment by check
normally is mailed within seven days after receipt of the redemption request in
proper form. If specified in the account application, the check will be payable
and sent to a designated financial institution. A wire will be sent only to the
shareholder's bank or brokerage account as shown on the account application.
Wire requests generally are paid the next business day, after deduction of the
cost of the wire transfer (currently $12). That charge and any similar service
fee may be changed without prior notice to shareholders. Wires to third parties
are not permitted.
Skyline may suspend or postpone the right of redemption at times when trading
on the New York Stock Exchange is restricted or as otherwise permitted by the
Securities and Exchange Commission. If a shareholder attempts to redeem shares
within 15 days after they have been purchased by check, Skyline may delay
payment of the redemption proceeds until it can verify that payment for the
purchase of the shares has been (or will be) received.
Skyline reserves the right to redeem shares in any account with a balance of
less than $750 in share value in any Portfolio. Prior to any such redemption,
Skyline will give shareholders with accounts not meeting the minimum balance
requirement 30 days' written notice during which time they may increase their
investment to avoid having shares redeemed. The $750 minimum balance requirement
will be waived if an account balance drops below $750 due to market activity.
NET ASSET VALUE
The price per share for a purchase order or redemption request is the net
asset value next determined after receipt of the order.
The net asset value of the shares of each Portfolio is determined as of the
close of regular session trading on the New York Stock Exchange (currently
12
<PAGE>
3:00 p.m., central time) each day it is open for trading. The net asset value
per share of each Portfolio is determined by dividing the value of all of its
securities and other assets, less its liabilities, by the number of shares of
the Portfolio outstanding. Each security traded on a national stock exchange or
on the Nasdaq National Market is valued at the last sale price or, if there have
been no sales on the valuation day, at the most recent bid price. Money Market
instruments with sixty days or less remaining from the valuation date until
maturity are valued on an amortized cost basis. Other securities traded
over-the-counter are valued at the last reported bid price. Other assets and
securities are valued by methods Skyline's board of trustees believes will
determine a fair value.
SHAREHOLDER SERVICES
SHAREHOLDER ACCOUNTS. Each shareholder receives a quarterly account statement
showing transactions in Portfolio shares with a balance denominated in Portfolio
shares. In addition, confirmations are sent to shareholders upon purchase,
redemption, dividend reinvestment, and change of shareholder address. For a fee,
a shareholder may obtain a historical transcript of his account by requesting
one in writing from Firstar Trust Company.
RETIREMENT PLANS. Investors may use Skyline as an investment for their
Individual Retirement Accounts ("IRAs"), profit sharing or pension plans,
Section 401(k) plans, Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations, and certain other qualified
plans. A master IRA plan, information regarding plan administration, fees, and
other details are available from the Distributor and authorized broker-dealers.
EXCHANGE PRIVILEGE. Skyline offers an exchange privilege among Skyline
Special Equities Portfolio, Skyline Special Equities II and two portfolio series
of Portico Funds, Inc. -- Money Market Fund and U.S. Government Money Market
Fund (the "Portico Money Market Funds"). You may only use the exchange privilege
to exchange into Skyline Special Equities Portfolio if you would be eligible to
invest in the Portfolio after January 30, 1997. (See "Purchasing Shares.") All
exchanges are based on the respective net asset value per share next calculated
after the receipt of an exchange request. Shares of either Portico Money Market
Fund or either Portfolio to be acquired must be available for sale in the
investor's state. To be effective on that date, a request to exchange into or
out of a Portico Money Market Fund must be received by the purchase or
redemption cutoff time described from time to time in the Portico Money Market
Funds prospectus, a copy of which can be obtained from Skyline at (312) 913-0900
or (800) 458-5222.
13
<PAGE>
The exchange privilege is not available for shares for which certificates have
been issued or which have been held for fewer than 15 days. Exchanges by
telephone are an automatic privilege unless the shareholder notifies Skyline on
the account application that such authorization has been withheld. Unless
authorization is withheld, Skyline will honor exchange requests by telephone at
(312) 913-0900 or (800) 458-5222. Skyline reserves the right to record all
telephone exchange requests. Reasonable procedures are used to confirm that
instructions received by telephone are genuine, such as requesting personal
identification information that appears on your application and recording the
conversation. You will bear the risk of loss due to unauthorized or fraudulent
instructions regarding your account, although Skyline may bear such risk if
reasonable procedures were not used. To reduce the risk of any fraudulent
instruction, the registration of the account into which shares are to be
exchanged must be identical to the registration of the originating account.
During periods of volatile economic and market conditions, a shareholder may
have difficulty making a redemption request by telephone, in which case an
exchange request would have to be made in writing.
Skyline reserves the right at any time without prior notice to suspend or
terminate the use of the exchange privilege by any person or class of persons.
Skyline believes that use of the exchange privilege by investors utilizing
market-timing strategies adversely affects the Portfolios. THEREFORE, SKYLINE
GENERALLY WILL NOT HONOR REQUESTS FOR EXCHANGES BY SHAREHOLDERS IDENTIFIED BY
SKYLINE AS "MARKET-TIMERS." Moreover, Skyline reserves the right at any time
without prior notice to suspend, limit, modify, or terminate the exchange
privilege in its entirety. Because such a step would be taken only if Skyline's
board of trustees believes it would be in the best interests of the Portfolios,
Skyline expects that it would provide shareholders with prior written notice of
any such action unless it appears that the resulting delay in the suspension,
limitation, modification, or termination of the exchange privilege would
adversely affect the Portfolios. IF SKYLINE WERE TO SUSPEND, LIMIT, MODIFY, OR
TERMINATE THE EXCHANGE PRIVILEGE, A SHAREHOLDER EXPECTING TO MAKE AN EXCHANGE
MIGHT FIND THAT AN EXCHANGE COULD NOT BE PROCESSED OR THAT THERE MIGHT BE A
DELAY IN THE IMPLEMENTATION OF THE EXCHANGE.
EXCHANGES OF SHARES ARE TAXABLE EVENTS AND MAY RESULT IN A GAIN OR LOSS FOR
FEDERAL INCOME TAX PURPOSES. A prospectus for the Portico Money Market Funds may
be obtained from the Distributor or any authorized broker-dealer. An investor
considering an exchange should refer to the relevant prospectus for additional
information.
AUTOMATIC INVESTMENT PLAN. Skyline has a pre-authorized check plan for
shareholders who wish to make automatic periodic investments in shares of a
Portfolio. With regard to investments in Skyline Special Equities Portfolio, you
may use the plan only if you are eligible to invest in the
14
<PAGE>
Portfolio. (See "Purchasing Shares.") You may establish an automatic investment
plan for Skyline Special Equities II or for Skyline Special Equities Portfolio
(if you are eligible to invest in that Portfolio) by opening an account with
$1,000 or more and delivering to Skyline an automatic investment plan
application along with a voided check. The plan enables Firstar Trust Company,
Skyline's transfer agent, to withdraw funds from your bank account or NOW
account on a predetermined basis for investment in shares of a Portfolio. You
may terminate your participation in the plan at any time without penalty by
written notice to Firstar Trust Company at least 15 days prior to the next
investment date. Skyline may modify or terminate the plan at any time, or from
time to time, without notice to shareholders.
SYSTEMATIC WITHDRAWAL PLAN. A shareholder may request that Skyline
periodically redeem shares of a Portfolio having a specified redemption value.
Payment is sent by check to the record holder(s) of the account. To initiate the
Systematic Withdrawal Plan, the account must have a share balance of $5,000 or
more and the periodic withdrawal must be in an amount of not less than $100.
Skyline may modify or terminate the Systematic Withdrawal Plan at any time, or
from time to time, without notice to shareholders.
DIVIDEND PURCHASE PLAN. A shareholder may have dividends and distributions
paid by a Portfolio automatically invested in shares of one of the Portico Money
Market Funds in which an account has been opened through Skyline's exchange
privilege. Similarly, dividends paid on shares in a Portico Money Market Fund
account opened by a Skyline shareholder through the exchange privilege may be
automatically invested in shares of Skyline Special Equities II or, if the
shareholder is eligible to invest in Skyline Special Equities Portfolio, in
shares of that Portfolio. The account into which the dividends are to be
invested must meet any applicable minimum balance requirement, and the account
registration must be identical to the registration of the account from which the
dividends or distributions are paid. The minimum subsequent investment amount
will be waived. Before establishing this plan to make investments in the Portico
Money Market Funds, a shareholder should obtain and read carefully the Portico
Money Market Funds prospectus, a copy of which may be obtained by calling
Skyline at (312) 913-0900 or (800) 458-5222.
DIVIDENDS AND DISTRIBUTIONS
Shareholders may receive two kinds of distributions from Skyline: dividends
and capital gains distributions. All dividends and capital gains distributions
are paid in the form of additional shares credited to an investor's account at
net asset value per share (without a sales charge) unless the shareholder has
requested on the account application or in writing that
15
<PAGE>
distributions be made in cash. The Portfolios expect to declare and pay net
investment income dividends and distributions of net realized short- and
long-term capital gains, if any, at least annually.
TAXES
Each Portfolio is a separate entity for federal income tax purposes. Skyline
intends for each Portfolio to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. To qualify, each Portfolio must meet
certain income, distribution and diversification requirements. In any year in
which a Portfolio so qualifies, it generally will not be subject to federal
income or excise tax to the extent that its taxable income is distributed to
shareholders.
Dividends paid by the Portfolios from net investment income together with
distributions of net short-term capital gains generally will be taxable to
shareholders as ordinary income, generally in the year received. Distributions
declared in October through December, to shareholders of record before January
1, and paid during January of the following year, will be considered paid on
December 31 in the calendar year declared. A portion of any dividend paid by
each Portfolio from its net investment income generally will be eligible for the
dividends-received deduction for corporations, depending upon the percentage of
the distributing Portfolio's net income derived from qualifying dividends.
Distributions by a Portfolio of net capital gains (the excess of net long-term
capital gains over net short-term losses) which are designated as capital gain
distributions are taxable to shareholders as long-term capital gains, regardless
of how long a shareholder has held shares in the Portfolio. To the extent a
Portfolio makes a distribution in excess of its current and accumulated earnings
and profits, the distribution will be treated first as a tax-free return of
capital, reducing the tax basis in a shareholder's shares, and then, to the
extent the distribution exceeds such basis, as a taxable gain on the sale of
such shares. Shareholders will be informed annually of the amount and nature of
Skyline's income and distributions. However, shareholders who are not subject to
income taxation will not be required to pay tax on amounts distributed to them.
Under federal law, exchanges and redemptions of shares, including exchanges of
shares in one Portfolio for shares in another Portfolio or another fund with
which Skyline has exchange privileges, are taxable events and, accordingly, may
result in capital gain or loss for shareholders participating in such
transactions. Shareholders electing to reinvest dividends or redemption proceeds
in new shares will nevertheless be treated as having received such distributions
for tax purposes.
16
<PAGE>
Any dividends or distributions have the effect of reducing the per share net
asset value of the shares by the amount of the dividends or distributions.
Although a dividend or distribution paid shortly after shares are purchased is
in effect a return of capital, these distributions are subject to taxes, even if
their effect is to reduce the per share net asset value below a shareholder's
cost. Skyline will notify you annually as to the tax status of dividend and
capital gain distributions paid by Skyline.
Dividend distributions, capital gains distributions and capital gains or
losses from redemptions and exchanges may be subject to state and local taxes.
In certain states, a portion of Skyline's income derived from certain direct
U.S. Government obligations may be exempt from state and local taxes. Skyline
will indicate each year the portion of each Portfolio's income, if any, which is
derived from such obligations.
Skyline is required by federal law to withhold, currently at the rate of 31%,
from reportable payments (which may include dividends, capital gain
distributions, and proceeds from redemptions) paid to shareholders who have not
provided a social security or taxpayer identification number, have not
represented that they either are not currently subject to backup withholding or
are exempt from backup withholding, and have not certified that such information
is correct. Any amounts withheld will be credited against a shareholder's normal
federal income tax liability.
The tax treatment of non-resident alien individuals, foreign corporations and
other non-U.S. shareholders may differ from that described above. All
shareholders should consult their own advisors concerning federal, state, and
local tax consequences of an investment in the Portfolios. This discussion is
included for general information only.
MANAGEMENT OF SKYLINE
THE TRUSTEES. The board of trustees has overall responsibility for the
conduct of Skyline's affairs. The trustees serve indefinite terms of unlimited
duration provided that a majority of trustees always has been elected by the
shareholders. The trustees appoint their own successors, provided that at least
two-thirds of the trustees, after such appointment, have been elected by the
shareholders. Shareholders may remove a trustee, with or without cause, upon the
declaration in writing or vote of two-thirds of Skyline's outstanding shares. A
trustee may be removed with or without cause upon the written declaration of a
majority of the trustees.
THE ADVISER. Skyline's investment adviser is Skyline Asset Management, L.P.
The Adviser is a Delaware limited partnership formed in 1995. The general
partner of the Adviser is Affiliated Managers Group, Inc.
17
<PAGE>
("AMG"), a Boston-based private holding company that makes equity investments in
investment management firms in which management personnel retain a significant
interest in the future of the business. Limited partnership interests in the
Adviser are held by corporations wholly owned by certain management personnel of
the Adviser, including the portfolio managers of each Portfolio. More than fifty
percent of the stock of AMG is controlled by TA Associates, Inc., a Delaware
corporation founded in 1968 which directly or indirectly has invested in more
than 200 enterprises prior to its investment in AMG.
The Adviser manages the investment and reinvestment of the assets of each
Portfolio. In addition the Adviser provides office space, facilities, equipment,
and personnel for managing the assets and administering Skyline's day-to-day
operations, and provides shareholder and investor services.
In return for the comprehensive fee described below, the Adviser bears all
ordinary costs and expenses attendant to operating the Portfolios except fees
paid to non-interested trustees, organization and initial offering expenses,
taxes, interest expense, portfolio transaction costs, and any extraordinary
costs or expenses not incurred in the course of Skyline's ongoing operation. The
overall expense ratio of each Portfolio is shown in the "Expense Information"
table in this Prospectus.
For its advisory, management, and administrative services, and for the
assumption of Skyline's ordinary operating expenses, each Portfolio pays the
Adviser a monthly comprehensive fee based on its average daily net asset value
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 average daily net assets in
excess of $600 million. Unlike most mutual funds, the Adviser rather than
Skyline pays out of its fee Skyline's ordinary operating expenses. In addition,
the Adviser has agreed to limit each Portfolio's expenses (including the
Adviser's fee but excluding extraordinary costs or expenses not incurred in the
ordinary course of Skyline's operation) to 1.75% of the average daily net assets
of Skyline Special Equities Portfolio and 2.00% of the average daily net assets
of Skyline Special Equities II. Expenses incurred in excess of these limits, if
any, will be reimbursed to the Portfolio by the Adviser.
Each Portfolio has a portfolio manager who works with a team of the Adviser's
investment professionals and analysts. William M. Dutton, portfolio manager for
Skyline Special Equities Portfolio, and Kenneth S. Kailin, portfolio manager for
Skyline Special Equities II, are responsible for the day-to-day management of
their respective Portfolios. Mr. Dutton has been portfolio manager of Skyline
Special Equities Portfolio since it began operations in 1987, and is President
and Chief Executive Officer of the Adviser and President of Skyline. In
addition, Mr. Dutton manages separately
18
<PAGE>
managed accounts. Before August 31, 1995, Mr. Dutton was an Executive Vice
President of Skyline's former investment adviser. Mr. Kailin has been the
portfolio manager of Skyline Special Equities II since it began operations in
1993, and is Principal-Portfolio Manager of the Adviser and an Executive Vice
President of Skyline. In addition, Mr. Kailin manages separately managed
accounts. Mr. Kailin was a Senior Vice President of Skyline's former investment
adviser from 1994 to August 31, 1995, Vice President from 1992 to 1994, and an
analyst prior thereto.
PORTFOLIO TRANSACTIONS. Decisions as to the purchase and sale of securities
for a Portfolio and the execution of these transactions, including the
negotiation of brokerage commissions on such transactions, are the Adviser's
responsibility. In general, the Adviser seeks to obtain prompt and reliable
execution of purchase and sale orders at the most favorable net prices or
yields. In determining the best net price and execution, the Adviser may take
into account a broker's or dealer's operational and financial capabilities and
the type of transaction involved.
The Adviser may consider research services provided by the broker or dealer,
some of which may be useful to the Adviser in its other business functions. To
the extent such research services are taken into account, the execution price
paid may be higher, but only in reasonable relation to the benefit of such
research services as determined in good faith by the Adviser. The Adviser is
authorized to place portfolio transactions with brokers or dealers participating
in the distribution of the Portfolios' shares, but only if the Adviser
reasonably believes that the execution and commission are comparable to those
available from other qualified firms.
The historical portfolio turnover rates of Skyline Special Equities Portfolio
and Skyline Special Equities II are included in the Financial Highlights.
PERFORMANCE. From time to time, in advertisements and sales literature,
Skyline may present information regarding the total return on a hypothetical
investment in a Portfolio for various periods of performance and may make
comparisons of such total return to various stock indexes (groups of unmanaged
common stocks), to the Consumer Price Index, or to groups of comparable mutual
funds.
Total return for a period is the percentage change in value during the period
of an investment in a Portfolio's shares, including the value of shares acquired
through reinvestment of all dividends and capital gains distributions. The
average annual total return for a given period may be calculated by finding the
average annual compounded rate of return that
19
<PAGE>
would equate a hypothetical $1,000 investment to the value of that investment
that could be redeemed at the end of the period, assuming reinvestment of all
distributions. All of the calculations described above will assume the
reinvestment of dividends and distributions in additional shares of the
Portfolio. Income taxes will not be taken into account.
In addition to the figures described above, Skyline might use rankings or
ratings determined by Lipper Analytical Services, Inc., an independent service
that monitors the performance of over 4,700 equity mutual funds, Morningstar,
Inc., or another service to compare the performance of a Portfolio with the
performance of (i) other funds of similar size and investment objective or (ii)
broader groups of funds. Skyline may also provide information about, or compare
performance of a Portfolio to, the historical returns on various types of
financial assets.
Performance of a Portfolio will vary from time to time, and past results are
not indicative of likely future performance. Performance information supplied by
Skyline may not provide a basis of comparison with other investments using
different reinvestment assumptions or time periods.
Further information about the Portfolios' performance is contained in the
Annual Reports of Skyline Special Equities Portfolio and Skyline Special
Equities II, copies of which may be obtained without charge by calling Skyline
at (312) 913-0900 or 1-800-458-5222.
SKYLINE AND ITS SHARES
Skyline was organized as a Massachusetts business trust on February 4, 1987,
and is an open-end, diversified management investment company. Skyline Special
Equities Portfolio began operations April 23, 1987, and Skyline Special Equities
II began operations on February 9, 1993. Skyline's name was changed to "Skyline
Funds" effective as of April 25, 1997, pursuant to an amendment to its Agreement
and Declaration of Trust.
SHARES. Under the terms of Skyline's Agreement and Declaration of Trust,
Skyline may issue an unlimited number of shares of beneficial interest without
par value for each series of shares authorized by the trustees. There are
currently two series authorized and outstanding. All shares issued will be fully
paid and non-assessable and will have no preemptive or conversion rights. Each
share of a series is entitled to participate pro rata in any dividends and other
distributions declared by Skyline's board of trustees on shares of that series.
All shares of a series have equal rights in the event of liquidation of that
series.
Under Massachusetts law, the shareholders of Skyline may, under certain
circumstances, be held personally liable for Skyline's obligations. However,
Skyline's Agreement and Declaration of Trust disclaims liability
20
<PAGE>
of shareholders, Skyline's trustees, and Skyline's officers for acts or
obligations of Skyline or a Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation, or contract entered into or
executed by Skyline or the board of trustees. Skyline's Agreement and
Declaration of Trust provides for indemnification out of the assets of a
Portfolio of all losses and expenses of any shareholder held personally liable
for the obligations of that Portfolio. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is remote, since it is
limited to circumstances in which the disclaimer is inoperative and Skyline
itself is unable to meet its obligations.
VOTING RIGHTS. Each share has one vote and fractional shares have fractional
votes. A separate vote of the shareholders of each Portfolio is required for
approval of Skyline's investment advisory agreement, any change in a Portfolio's
fundamental investment policies and restrictions, and any matters which affect
an individual Portfolio. Shareholders of a Portfolio are not entitled to vote on
any matter not affecting that Portfolio. All shareholders of Skyline vote
together in the election of trustees.
SHAREHOLDER INQUIRIES. Inquiries should be addressed to Skyline Funds, c/o
Skyline Asset Management, L.P., 311 South Wacker Drive, Suite 4500, Chicago,
Illinois 60606. Telephone inquiries may be made at (312) 913-0900 or (800)
458-5222.
21
<PAGE>
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
SHAREHOLDER SERVICES:
Skyline Funds
311 South Wacker Drive, Suite 4500
Chicago, IL 60606
(800) 458-5222
(312) 913-0900
INVESTMENT ADVISER:
SKYLINE ASSET MANAGEMENT, L.P.
311 SOUTH WACKER DRIVE, SUITE 4500
CHICAGO, IL 60606
DISTRIBUTOR:
FUNDS DISTRIBUTOR, INC.
60 STATE STREET, SUITE 1300
BOSTON, MA 02109
CUSTODIAN AND TRANSFER AGENT:
FIRSTAR TRUST COMPANY
P.O. BOX 701
MILWAUKEE, WI 53201
INDEPENDENT AUDITORS:
ERNST & YOUNG LLP
233 SOUTH WACKER DRIVE
CHICAGO, IL 60606
LEGAL COUNSEL:
BELL, BOYD & LLOYD
THREE FIRST NATIONAL PLAZA, SUITE 3300
CHICAGO, ILLINOIS 60602
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, TO ACT AS AGENT FOR SKYLINE FUNDS, NOR
IS ANY PERSON AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
NOT CONTAINED IN THIS PROSPECTUS OR IN SUPPLEMENTARY INFORMATION OR IN
SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY SKYLINE FUNDS, AND NO PERSON IS
ENTITLED TO RELY UPON ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN OR
THEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
SKYLINE FUNDS, THE SKYLINE LOGO, SKYLINE SPECIAL EQUITIES PORTFOLIO AND
SKYLINE SPECIAL EQUITIES II ARE REGISTERED SERVICE MARKS OF AFFILIATED MANAGERS
GROUP, INC.
- -------------------------------------
S K Y L I N E F U N D S-REGISTERED TRADEMARK-
SKYLINE SPECIAL
EQUITIES PORTFOLIO-REGISTERED TRADEMARK-
SKYLINE SPECIAL
EQUITIES II-REGISTERED TRADEMARK-
- ----------------------------
PROSPECTUS
- ---------------------------------
APRIL 25, 1997
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
<PAGE>
SKYLINE FUNDS-REGISTERED TRADEMARK-
311 SOUTH WACKER DRIVE, SUITE 4500
CHICAGO, ILLINOIS 60606
(312) 913-0900
(800) 458-5222
STATEMENT OF ADDITIONAL INFORMATION
April 25, 1997
- --------------------------------------------------------------------------------
SKYLINE SPECIAL EQUITIES PORTFOLIO and SKYLINE SPECIAL EQUITIES II are each a
series of Skyline Funds ("Skyline"). Each series of Skyline represents shares of
beneficial interest in a separate portfolio of securities and other assets, with
its own investment objective and policies. This Statement of Additional
Information is not a prospectus. It should be read in conjunction with the
Skyline Funds Prospectus for Skyline Special Equities Portfolio and Skyline
Special Equities II dated April 25, 1997, and any supplement to that Prospectus.
That Prospectus can be obtained without charge by calling or writing to Skyline.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SKYLINE AND THE PORTFOLIOS................................................................................. 2
INVESTMENT OBJECTIVE AND POLICIES.......................................................................... 2
INVESTMENT RESTRICTIONS.................................................................................... 3
PERFORMANCE INFORMATION.................................................................................... 4
PRINCIPAL SHAREHOLDERS..................................................................................... 7
MANAGEMENT OF SKYLINE...................................................................................... 8
INVESTMENT ADVISORY SERVICES............................................................................... 9
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................................................... 10
PURCHASE AND REDEMPTION OF SHARES.......................................................................... 12
TAXES...................................................................................................... 13
GENERAL INFORMATION........................................................................................ 13
FINANCIAL STATEMENTS....................................................................................... 14
</TABLE>
<PAGE>
SKYLINE AND THE PORTFOLIOS
Skyline's name was changed from "Skyline Fund" to "Skyline Funds" as of the
date of this Statement of Additional Information. As used in this Statement of
Additional Information, "Special Equities Portfolio" means Skyline Special
Equities Portfolio, and "Special Equities II" means Skyline Special Equities II.
Special Equities Portfolio and Special Equities II are sometimes referred to
together as the "Portfolios." Skyline Asset Management, L.P. (the "Adviser")
provides investment advisory and administrative services to each of the
Portfolios.
INVESTMENT OBJECTIVE AND POLICIES
SPECIAL EQUITIES PORTFOLIO seeks maximum capital appreciation primarily
through investment in common stocks that the Adviser considers undervalued
relative to earnings, book value, or potential earnings growth. Special Equities
Portfolio emphasizes investments in small companies whose outstanding shares
have an aggregate market value of less than $700 million. The Adviser attempts
to identify companies that it believes are neglected by the investment
community.
SPECIAL EQUITIES II seeks maximum capital appreciation primarily through
investment in common stocks that the Adviser considers undervalued relative to
earnings, book value, or potential earnings growth. Special Equities II
emphasizes investments in small companies whose outstanding shares have an
aggregate market value of $400 million to $2 billion. The Adviser attempts to
identify companies that it believes are neglected by the investment community.
Small-capitalization stocks (for this purpose, under $2 billion in market
value) as a group may outperform or underperform larger capitalization stocks as
a group over various periods. According to various studies of stock market
performance commencing in the 1920s or 1930s, stocks of small-capitalization
companies have provided a greater total return to investors than have stocks of
companies with larger market capitalizations.(1)
There can be no assurance that a Portfolio's investment objective will be
achieved. Each Portfolio's investment objective and policies may be changed by
Skyline's board of trustees without shareholder approval. However, shareholder
approval is required for changes in a Portfolio's fundamental investment
restrictions, and no change in a Portfolio's investment objective will be
implemented without at least 30 days' prior notice to shareholders.
TEMPORARY INVESTMENTS. To manage cash inflows or in anticipation of
redemptions, each Portfolio may invest, without limitation, in high-quality
fixed-income securities and may hold assets in cash or cash equivalents.
REPURCHASE AGREEMENTS. Each Portfolio may invest up to 5% of its assets in
repurchase agreements. Repurchase agreements involve the acquisition by a
Portfolio of an underlying debt instrument, subject to an obligation of the
seller to repurchase and the Portfolio to resell the instrument, at a fixed
price, including yield, within a specified term. A Portfolio could suffer a loss
and increased expense in connection with the sale of the securities if the
seller does not repurchase them in accordance with the terms of the repurchase
agreement. The Portfolios did not invest in repurchase agreements in the most
recent fiscal year and have no present intention of doing so.
FOREIGN SECURITIES. The Portfolios may invest in securities of foreign
issuers that are not publicly traded in the United States ("foreign
securities"). Investment in foreign securities may represent a greater degree of
risk (including risk related to exchange rate fluctuations, tax provisions,
exchange and currency controls, and expropriation of assets) than investment in
securities of domestic issuers.
- ------------------------
(1) E.g., Roger G. Ibbotson and Rex A. Sinquefield, STOCKS, BONDS, BILLS AND
INFLATION, 1989, updated in STOCKS, BONDS, BILLS AND INFLATION 1993 YEARBOOK;
Prudential Securities, STRATEGY WEEKLY, March 17, 1993.
2
<PAGE>
For this purpose, foreign securities do not include securities represented by
American Depository Receipts (ADRs), securities of Canadian issuers, and
securities guaranteed by a United States person. Neither Portfolio expects to
invest as much as 5% of its assets in foreign securities.
PORTFOLIO TURNOVER. The portfolio turnover rate of Special Equities Portfolio
increased from 71% in 1995 to 130% in 1996, and the portfolio turnover rate of
Special Equities II increased from 102% in 1995 to 145% in 1996. The increase in
the rates in 1996 was due to an increase in the number of stocks reaching their
sell targets, primarily as a result of a rising stock market and good stock
selection. For Special Equities Portfolio, the higher rate in 1996 also reflects
the reduction over the course of the year in the number of holdings in the
portfolio.
INVESTMENT RESTRICTIONS
For each Portfolio, Skyline has adopted the following investment restrictions
(which may not be changed without the approval of a majority of a Portfolio's
outstanding shares), under which a Portfolio may not:
1. Issue senior securities or borrow money except (i) from banks for
temporary or emergency purposes in amounts not exceeding 10% of the
value of the Portfolio's assets at the time of borrowing (including the amount
borrowed) (a Portfolio will not purchase securities when its borrowings exceed
5% of the value of its assets), and (ii) in connection with transactions in
options, futures, or futures options.
2. Purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by
companies which invest in real estate, or interests therein, except that it
may not invest over 10% of the value of its assets in real estate investment
trusts).
3. Invest more than 5% of its assets (valued at the time of investment)
in securities of any one issuer, except government obligations or
bank certificates of deposit and bankers' acceptances.
4. Acquire securities of any one issuer which at the time of investment
(i) represent more than 10% of the outstanding voting securities of
the issuer or (ii) have a value greater than 10% of the value of the
outstanding voting securities of any one issuer.
5. Invest more than 5% of its assets (measured at the time of
investment) in securities of an issuer with less than three years
operating history (including predecessors).
6. Sell securities short or purchase securities on margin (but each
Portfolio may obtain such short-term credits as may be necessary for
the clearance of transactions and may make margin payments in connection with
transactions in options, futures, and options on futures).
7. Invest more than 25% of its assets (valued at the time of investment)
in the securities of companies in any one single industry, except
government obligations.
8. Make loans to other persons except that it reserves freedom of
action, consistent with its other investment policies and
restrictions, to purchase bonds or other debt obligations of types commonly
offered publicly or privately and purchased by financial institutions, even
though the purchase of such debt obligations may be deemed to be making loans.
9. Underwrite any issue of securities, except as it may be deemed to be
an underwriter under the Securities Act of 1933 in connection with
the sale of securities in accordance with its investment objective, policies,
and limitations.
Skyline has also adopted the following additional restrictions and policies
with respect to each Portfolio (which may be changed by the board of trustees
without shareholder approval). Under these additional policies and restrictions,
a Portfolio may not:
A. Invest in companies for the purpose of exercising control or
management.
3
<PAGE>
B. Acquire securities of other investment companies except (i) by
purchase in the open market, where no commission or profit to a
sponsor or dealer results from such purchase other than the customary broker's
commission and (ii) where the acquisition results from a dividend, or a
merger, consolidation or other reorganization. In addition to this
restriction, the 1940 Act provides that the Portfolio may neither purchase
more than 3% of the voting securities of any one investment company nor invest
more than 10% of the Portfolio's assets (valued at the time of investment) in
all investment company securities purchased by the Portfolio.
C. Invest in securities of other open-end investment companies.
D. Mortgage, hypothecate, or in any manner transfer as security for
indebtedness, any securities owned or held by it, except that this
restriction does not apply to borrowings permitted above.
E. Purchase or retain securities of any issuer if an aggregate of 5% of
the securities of such issuer are owned by those officers, directors,
or trustees of Skyline or of its Adviser who each own beneficially more than
of 1% of its securities.
F. Invest more than 5% of its assets (valued at the time of investment)
in restricted securities or securities which are not readily
marketable, including (i) securities subject to legal or contractual
restrictions on resale, (ii) fixed time deposits or certificates of deposit
subject to withdrawal penalties, other than overnight deposits, or (iii)
repurchase agreements which expire in excess of seven days.
G. Invest over 5% of its assets in repurchase agreements or warrants.
H. Invest in oil, gas, or other mineral exploration or development
programs, except it may invest in marketable securities of
enterprises engaged in oil, gas, or mineral exploration.
I. Invest less than 65% of its total assets in common stocks.
J. Invest in financial futures, options, or options on financial
futures.
PERFORMANCE INFORMATION
From time to time Skyline may quote total return performance data for its
Portfolios. Total return for a period is the percentage change in value during
the period of an investment in a Portfolio's shares including the value of
shares acquired through reinvestment of all dividends and capital gains
distributions. An average annual total return for a given period may be computed
by finding the average annual compounded rate that would equate a hypothetical
initial amount invested of $1,000 to the value of that investment that could be
redeemed at the end of the period, assuming reinvestment of all distributions.
Average annual total return is computed as follows:
ERV = P(1+T)n
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment made
at the beginning of the period, at the end of the period (or
fractional portion thereof)
4
<PAGE>
For example, total return and average annual total return at December 31, 1996
of an investment of $1,000 in Special Equities Portfolio and Special Equities II
were:
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL TOTAL
RETURN (%) RETURN (%)
----------- ---------------
<S> <C> <C>
SPECIAL EQUITIES PORTFOLIO
1 Year................................................................... 30.37 30.37
5 Years.................................................................. 156.63 20.74
Life of Portfolio........................................................ 358.97 17.02
(April 23, 1987)
SPECIAL EQUITIES II
1 Year................................................................... 26.60 26.60
Life of Portfolio........................................................ 65.99 13.90
(February 9, 1993)
</TABLE>
Total return and average annual total return figures assume reinvestment of
all dividends and distributions. Income taxes are not taken into account. Total
return and average annual total return figures for Special Equities Portfolio do
not take into account the effect of the sales charge that applied to sales of
that Portfolio's shares before August 13, 1992. If such charges were taken into
account, Special Equities Portfolio's total return and average annual total
return figures over five years and the life of the Portfolio would be lower. The
figures are not a guarantee of future results. The performance of a Portfolio is
a result of conditions in the securities markets, portfolio management, and
operating expenses. Although total return information is useful in reviewing a
Portfolio's performance and in providing some basis for comparison with other
investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.
In advertising and sales literature, the performance of a Portfolio may be
compared with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, other accounts, limited
liability investment companies or partnerships managed or advised by the
Adviser, and other competing investment products available from or through other
financial institutions. The composition of these indexes, averages or accounts
differs from that of the Portfolios. The comparison of a Portfolio to an
alternative investment should consider differences in features and expected
performance.
5
<PAGE>
A Portfolio may also note (or provide reprints of articles or charts
containing) its mention (including performance or other comparative rankings) in
newspapers, magazines, or other media from time to time. Newspapers and
magazines which might mention Skyline and its Portfolios include, but are not
limited to, the following:
Barron's Los Angeles Times
Business Week Money
Changing Times The Mutual Fund Letter
Chicago Mutual Fund Values (Morningstar)
Chicago Tribune Newsweek
Chicago Sun-Times The New York Times
Crain's Chicago Business Pensions and Investments
Consumer Reports Personal Investor
Consumer Digest Smart Money
Financial World Stanger Reports
FA Advisor Time
Forbes USA Today
Fortune U.S. News and World Report
Institutional Investor The Wall Street Journal
Investor's Daily Worth
Kiplinger's Personal Finance
When a newspaper, magazine, or other publication mentions Skyline or a
Portfolio, such mention may include: (i) listings of some or all of a
Portfolio's holdings; (ii) descriptions of characteristics of some or all of the
securities held by a Portfolio, including price-earnings ratios, earnings,
growth rates and other statistical information, and comparisons of that
information to similar statistics for the securities comprising any of the
indexes or averages listed below; and (iii) descriptions of the economic and
market outlook, generally and for a Portfolio, in the view of Skyline, a
portfolio manager or the Adviser.
Each Portfolio may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
The performance of the Portfolios may be compared to stock market indexes or
averages, including the following:
Dow-Jones Industrial Average New York Stock Exchange Composite Index
Russell 1000 Index American Stock Exchange Composite Index
Russell 2000 Small Stock Index NASDAQ Composite
Russell 2500 Index NASDAQ Industrials
Russell 3000 Index (These indexes generally reflect the
Russell Mid-Cap Stock Index performance of stocks traded in the
Standard & Poor's 500 Stock Index indicated markets.)
Standard & Poor's 400 Industrials
Standard & Poor's Mid-Cap 400 Index
Wilshire 5000
Wilshire 4500
Wilshire 4000
(These indexes are widely recognized
indicators of general U.S. stock
market results.)
The Portfolios' performance may also be compared to mutual fund industry
indexes or averages, including the following: Value Line Index; Lipper Capital
Appreciation Fund Average; Lipper Growth
6
<PAGE>
Funds Average; Lipper Small Company Growth Funds Average; Lipper General Equity
Funds Average; Lipper Equity Funds Average; Lipper Mid-Cap Average; Lipper Small
Company Growth Fund Index; Morningstar Growth Average; Morningstar Aggressive
Growth Average; Morningstar U.S. Diversified Average; Morningstar Equity Fund
Average; Morningstar Hybrid Fund Average; Morningstar All Equity Funds Average;
and Morningstar General Equity Average; Morningstar MidCap/Value Average;
Morningstar Small Cap Value Average.
Lipper Small Company Growth Fund Index reflects the net asset value weighted
total return of the largest thirty growth funds as calculated, and published by
Lipper Analytical Services, Inc. ("Lipper"), an independent service that
monitors the performance of more than 1,000 funds.
Lipper and Morningstar, Inc. ("Morningstar"), classify, calculate, and publish
the Lipper and Morningstar averages, respectively, which are unweighted averages
of total return performance of mutual funds. The Portfolios may also use
comparative performance as computed in a ranking by Lipper or category averages
and rankings provided by another independent service. Should Lipper or another
service reclassify a Portfolio to a different category or develop (and place a
Portfolio into) a new category, that Portfolio may compare its performance or
ranking against other funds in the newly assigned category, as published by the
service. Moreover, each Portfolio may compare its performance or ranking against
all funds tracked by Lipper or another independent service, and may cite its
rating, recognition or other mention by Morningstar or any other entity.
Morningstar's rating system is based on risk-adjusted total return performance
and is expressed in a star-rating format. The risk-adjusted number is computed
by subtracting a Portfolio's risk score (which is a function of the Portfolio's
monthly returns less the 3-month Treasury bill return) from the Portfolio's
load-adjusted total return score. This numerical score is then translated into
rating categories, with the top 10% labeled five star, the next 22.5% labeled
four star, the next 35% labeled three star, the next 22.5% labeled two star and
the bottom 10% one star. A high rating reflects either above-average returns or
below-average risk, or both.
To illustrate the historical returns on various types of financial assets, the
Portfolios may use historical data provided by Ibbotson Associates, Inc.
("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or obtains)
very long-term (since 1926) total return data (including, for example, total
return indexes, total return percentages, average annual total returns and
standard deviations of such returns) for the following asset types: common
stocks, small company stocks, long-term corporate bonds, long-term government
bonds, intermediate-term government bonds and U.S. Treasury bills. Similarly,
the Portfolios may use Ibbotson's historical data regarding the Consumer Price
Index. The Portfolios may also use historical data compiled by Prudential
Securities, Inc., or by other similar sources believed by Skyline to be
accurate, illustrating the past performance of small-capitalization stocks,
large-capitalization stocks, common stocks, equity securities, growth stocks
(small-capitalization, large-capitalization, or both) and value stocks
(small-capitalization, large-capitalization, or both).
PRINCIPAL SHAREHOLDERS
The only persons known by Skyline to own of record or "beneficially" (within
the meaning of that term as defined in rule 13d-3 under the Securities Exchange
Act of 1934) 5% or more of the outstanding shares of any Portfolio as of March
31, 1997 were the Mesirow Financial Corporation Savings Plan/Mesirow Financial
Corporation Savings Trust, as record owner for various beneficial owners, which
held 5.42% and Charles Schwab & Co., Inc., as a nominee for various beneficial
owners which held 24.66% of the shares of Special Equities Portfolio, and
Charles Schwab & Co., Inc., as nominee for various beneficial owners, which held
34.87% of the shares of Special Equities II. The address of Mesirow Financial
Corporation Savings Plan/Mesirow Financial Corporation Savings Trust is 350
North Clark Street, Chicago, Illinois 60610. The address of Charles Schwab &
Co., Inc., is 101 Montgomery Street, San Francisco, California 94104.
7
<PAGE>
MANAGEMENT OF SKYLINE
Trustees and officers of Skyline, and their principal business occupations
during at least the last five years, are shown below.
WILLIAM M. DUTTON,* 43, PRESIDENT AND TRUSTEE. President and Chief Executive
Officer, Skyline Asset Management, L.P. and registered representative, Funds
Distributor, Inc. Previously, Executive Vice President and Portfolio Manager
(Special Equities Portfolio), Mesirow Asset Management, Inc.
WILLIAM L. ACHENBACH, 54, TRUSTEE. President, W.L. Achenbach & Associates,
Inc., a financial counseling firm. Previously, Executive Vice President,
Brownson, Rehmus & Foxworth, Inc., a financial counseling firm.
PAUL J. FINNEGAN, 44, TRUSTEE. Vice President, Madison Dearborn Partners,
Inc., a venture capital firm. Previously, Vice President, First Chicago Venture
Capital, a venture capital firm.
STEPHEN F. KENDALL, 42, TRUSTEE. Regional Vice President, Metro Region,
Nabisco Biscuit Company.
DAVID A. MARTIN, 45, TRUSTEE. Attorney and Principal, Righeimer, Martin &
Cinquino, P.C.
KENNETH S. KAILIN, 38, EXECUTIVE VICE PRESIDENT. Principal-Portfolio Manager,
Skyline Asset Management, L.P. Previously, Senior Vice President and Portfolio
Manager (Special Equities II), Mesirow Asset Management, Inc.
GEOFFREY P. LUTZ, 46, EXECUTIVE VICE PRESIDENT. Principal-Marketing, Skyline
Asset Management, L.P. and registered representative, Funds Distributor, Inc.
Previously, Vice President, Mesirow Asset Management, Inc. and registered
representative, Mesirow Financial, Inc. and Mesirow Investment Services, Inc.
MICHAEL MALONEY, 35, SENIOR VICE PRESIDENT. Principal-Senior Securities
Analyst, Skyline Asset Management, L.P. Previously, Securities Analyst, Mesirow
Asset Management, Inc. and prior to joining Mesirow Asset Management, Inc.,
Securities Analyst, Baker, Fentress & Company, a closed-end management
investment company.
SCOTT BLIM, 37, SECRETARY AND TREASURER. Chief Operating Officer, Skyline
Asset Management, L.P. Previously, Vice President, Director and Chief
Administrative Officer, Murray Johnstone International Limited, an investment
adviser.
The address of Messrs. Dutton, Kailin, Lutz, Maloney and Blim is c/o Skyline
Asset Management, L.P., 311 South Wacker Drive, Suite 4500, Chicago, Illinois
60606. The addresses of the other trustees are: William L. Achenbach, 510 East
Main Street, Charlottesville, Virginia 23902; Paul J. Finnegan, Three First
National Plaza, Suite 1330, Chicago, Illinois 60602; Stephen J. Kendall, 379
Shelbourne Terrace, Ridgewood, New Jersey 07450; David A. Martin, 135 South
LaSalle Street, Chicago, Illinois 60603.
As of March 31, 1997, the trustees and officers of Skyline owned, in the
aggregate, 49,791 shares of Special Equities Portfolio and 12,122 shares of
Special Equities II, or less than 1% of each Portfolio.
The trustees of Skyline who are not "interested persons" of Skyline, as
defined in the Investment Company Act of 1940 (the "1940 Act"), receive from
Skyline an annual retainer of $3,000 from each of the Portfolios and a fee of
$400 for each meeting of the board of trustees (or any committee thereof)
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings.
- ------------------------
* INDICATES AN "INTERESTED PERSON" OF SKYLINE, AS DEFINED IN THE INVESTMENT
COMPANY ACT OF 1940.
8
<PAGE>
The following table sets forth compensation paid by Skyline during the fiscal
year ended December 31, 1996, to each of the trustees of Skyline. Skyline has no
retirement or pension plans. The trustees and officers affiliated with Skyline
do not receive compensation from Skyline.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
NAME OF TRUSTEE FROM SKYLINE
- ------------------------------------------------------------------------------------------ -----------------------
<S> <C>
William L. Achenbach...................................................................... $ 8,400
William M. Dutton(1)...................................................................... 0
Paul J. Finnegan.......................................................................... 8,400
Stephen F. Kendall........................................................................ 8,400
David A. Martin........................................................................... 8,400
</TABLE>
- ------------------------
(1)
Indicates an "interested person" of Skyline, as defined in the 1940 Act,
during the fiscal year ended December 31, 1996.
INVESTMENT ADVISORY SERVICES
Skyline Asset Management, L.P. (the "Adviser") provides investment advisory
and administrative services to Skyline for the Portfolios pursuant to Investment
Advisory Agreements dated August 31, 1995 (the "Agreements"). The Adviser is a
Delaware limited partnership, the general partner of which is Affiliated
Managers Group, Inc. ("AMG") and the limited partners of which are corporations
wholly owned by Messrs. Dutton, Kailin, Lutz and Maloney, respectively.
AMG is a Boston-based private holding company that makes equity investments in
investment management firms in which management personnel retain a significant
interest in the future of the business. AMG is a Delaware corporation which has
its offices at Two International Place, 23rd Floor, Boston, MA 02110. AMG may be
deemed to have as its parent -- TA Associates, Inc., a Delaware corporation. The
address of TA Associates, Inc., is High Street Tower, Suite 2500, 125 High
Street, Boston, MA 02110.
Under the Agreements, the Adviser pays all of the Portfolios' ordinary costs
and expenses attendant to operating the Portfolios except the advisory fees,
fees paid to non-interested trustees, organization and initial offering
expenses, interest expenses, taxes, portfolio transaction costs, and any
extraordinary costs or expenses such as legal, accounting, or other costs or
expenses not incurred in the course of Skyline's ongoing operation. The initial
offering and organization expenses of $22,241 for Special Equities II were
advanced to Skyline by Mesirow Asset Management, Inc., and Special Equities II
is reimbursing Mesirow Asset Management, Inc., for such expenses in equal
installments without interest over 20 calendar quarters. Reimbursement by
Special Equities Portfolio of organizational expenses advanced by Mesirow Asset
Management, Inc., has been completed.
Expenses borne by Skyline pursuant to the Agreements, as described above, that
are attributable to a particular Portfolio are charged to that Portfolio. Other
expenses of Skyline are allocated among the Portfolios on a reasonable basis as
determined by Skyline's board of trustees.
For its management and advisory services, for providing shareholder and
investor servicing, and for the assumption of the Portfolios' ordinary operating
expenses, the Adviser is paid a monthly comprehensive fee from each Portfolio
based on each Portfolio's average daily net assets. Under the Agreements, each
Portfolio pays the Adviser a fee at the annual rate of 1.50% of the first $200
million of its average daily net assets, 1.45% of the next $200 million, 1.40%
of the next $200 million, and 1.35% of any excess over $600 million.
The Adviser has agreed that it will reimburse each Portfolio to the extent
that, in any fiscal year, the aggregate expenses of the Portfolio, including the
advisory fee but excluding extraordinary costs or expenses such as legal,
accounting, or other costs or expenses not incurred in the normal course of
Skyline's ongoing operation, exceed an annual rate of 1.75% of the average daily
net asset value of Special Equities Portfolio and 2.00% of the average daily net
assets of Special Equities II. Reimbursement, if any, is made monthly.
9
<PAGE>
Special Equities Portfolio paid comprehensive management fees to the Adviser
and to Skyline's prior investment adviser totaling $2,508,468, $2,890,146, and
$3,253,041 in the years ended December 31, 1996, 1995, and 1994, respectively.
Special Equities II paid comprehensive management fees to the Adviser and to
Skyline's prior investment adviser totaling $1,428,303, $1,407,252, and
$1,151,209 in the years ended December 31, 1996, 1995, and 1994, respectively.
The Agreements provide that the Adviser shall not be liable for any loss
suffered by Skyline or its shareholders as a consequence of any act of omission
in connection with investment advisory or portfolio services under the
Agreements, except by reason of willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its duties or from
the Adviser's reckless disregard of its obligations and duties under the
Agreements.
The Agreements may be continued from year to year only so long as the
continuance of each is approved annually (a) by the vote of a majority of the
trustees of Skyline who are not "interested persons" of Skyline or the Adviser
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the board of trustees of Skyline or by the vote of a majority (as
defined in the 1940 Act) of the outstanding shares of that Portfolio. The
Agreements are terminable with respect to a Portfolio without penalty, on 60
days' notice, by the trustees of Skyline or by vote of a majority of the
outstanding shares of that Portfolio, or, on not less than 90 days' notice, by
the Adviser. Each of the Agreements automatically terminates in the event of its
assignment (as defined in the 1940 Act).
The Adviser specializes in investing in stocks of companies with small market
capitalizations. Each Portfolio has a portfolio manager who works with a team of
the Adviser's investment professionals and analysts. The portfolio manager for
Special Equities Portfolio is William M. Dutton, President of Skyline. His team
for Special Equities Portfolio includes Kenneth S. Kailin, Executive Vice
President of Skyline. Mr. Kailin is portfolio manager for Special Equities II.
His team for Special Equities II includes Mr. Dutton.
Mr. Dutton is the Adviser's President and Chief Executive Officer. Mr. Dutton,
who is a certified public accountant, received an undergraduate degree in
English Literature from Princeton University, and has a master's degree in
accounting from the University of Illinois. He joined Mesirow Financial Services
Inc., as an analyst in 1980 after practicing as an accountant for one year, and
became a portfolio manager in 1984 with Mesirow Asset Management, Inc., the
former adviser to the Portfolios. In addition to Special Equities Portfolio, Mr.
Dutton manages separately managed accounts. Mr. Dutton was named 1992 Portfolio
Manager of the Year by Morningstar, Inc.
Mr. Kailin is a Principal-Portfolio Manager of the Adviser. He joined Mesirow
Asset Management, Inc., the former adviser to the Portfolios, in 1987 as a
securities analyst and was promoted to vice president in 1992 and to senior vice
president in 1994. Mr. Kailin received his Bachelor of Science degree in Finance
from Indiana University and his M.B.A. degree from the University of Chicago. In
addition, he holds the Chartered Financial Analyst designation.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Portfolio transactions are placed with those securities brokers and dealers
that the Adviser believes will provide the best value in transaction and
research services either in a particular transaction or over a period of time.
Although some transactions involve only brokerage services, many involve
research services as well.
In valuing brokerage services, the Adviser makes a judgment as to which
brokers are capable of providing the most favorable net price (not necessarily
the lowest commission considered alone) and the best execution in a particular
transaction. Best execution connotes not only general competence and reliability
of a broker, but specific expertise and effort of a broker in overcoming the
anticipated difficulties in fulfilling the requirements of particular
transactions, because the problems of execution and the required skills and
effort vary greatly among transactions.
10
<PAGE>
In valuing research services, the Adviser makes a judgment of the usefulness
of the research information provided by a broker to the Adviser in managing the
Portfolios. Although the information, e.g., data or recommendations concerning
particular securities, sometimes relates to the specific transaction placed with
the broker, the research predominately consists of a wide variety of information
concerning companies, industries, investment strategy, and economic, financial
and political conditions and prospects useful to the Adviser in advising Skyline
and other accounts.
The reasonableness of brokerage commissions paid in relation to transaction
and research services received is evaluated by the staff of the Adviser on an
ongoing basis. The general level of brokerage charges and other aspects of the
portfolio transactions for the Portfolios are reviewed periodically by Skyline's
board of trustees.
The Adviser is the principal source of information and advice to the
Portfolios and is responsible for making and initiating the execution of
investment decisions. However, the board of trustees of Skyline recognizes that
it is important for the Adviser, in performing its responsibilities to Skyline,
to continue to receive and evaluate the broad spectrum of economic and financial
information which many securities brokers have customarily furnished in
connection with brokerage transactions, and that in compensating brokers for
their services, it is in the interest of Skyline to take into account the value
of the information received for use in advising Skyline. Consequently, the
commission paid to a broker providing research services may be greater than the
amount of commission another broker would charge for the same transaction. The
extent, if any, to which receipt of such information may reduce the expenses of
the Adviser in providing management services to Skyline is not determinable. In
addition, the board of trustees understands that other clients of the Adviser
also may benefit from the information obtained for Skyline, in the same manner
that Skyline also may benefit from information obtained by the Adviser in
performing services for others.
Transactions of Skyline in the over-the-counter market and the third market
are executed with primary market makers acting as principals except where it is
believed that better prices and execution may be obtained from others.
The Adviser is further authorized to allocate the orders placed by it on
behalf of Skyline to brokers and dealers who provide research services to
Skyline or the Adviser. Consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., and subject to the policy of
seeking the best price and execution as stated above, sales of shares of Skyline
by a broker-dealer may be considered by the Adviser in the selection of
broker-dealers to execute portfolio transactions for Skyline.
Although investment decisions for Skyline are made independently from those
for other investment advisory clients of the Adviser, the same investment
decision may be made for both Skyline and one or more other advisory clients. If
both Skyline and other clients purchase or sell the same class of securities on
the same day, the transactions will be allocated as to amount and price in a
manner considered equitable to each.
The following table shows the aggregate brokerage commissions (excluding the
gross underwriting spread on securities purchased in underwritten offerings)
paid by Special Equities Portfolio and Special Equities II during the periods
indicated, as well as the aggregate commissions paid to persons who were
affiliated persons of Skyline as of the time such payments were made:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994
------------------- --------------------- ---------------------
<S> <C> <C> <C>
SPECIAL EQUITIES PORTFOLIO
Aggregate commissions........................ $ 857,984(100%) $ 654,303(100%) $ 1,219,421(100%)
Commissions paid to affiliates............... 0(0%) 14,544(2.2%) 37,106(3.0%)
SPECIAL EQUITIES II
Aggregate commissions........................ $ 541,341(100%) $ 508,083(100%) $ 431,312(100%)
Commissions paid to affiliates............... 0(0%) 0(0.0%) 7,408(1.7%)
</TABLE>
11
<PAGE>
The brokerage commissions paid by Special Equities Portfolio to affiliated
persons during fiscal years 1996, 1995, and 1994 were paid in connection with
transactions aggregating 0%, 4%, and 3%, respectively, of the aggregate dollar
amount of transactions involving the payment of brokerage commissions by Special
Equities Portfolio. Of the aggregate brokerage commissions paid during fiscal
year 1996, Special Equities Portfolio paid $93,177 to brokers who furnished
research services, and such brokers effected transactions aggregating 11% of the
aggregate dollar amount of transactions involving the payment of brokerage
commissions by Special Equities Portfolio.
The brokerage commissions paid by Special Equities II to affiliated persons
during fiscal years 1996, 1995, and 1994 were paid in connection with
transactions aggregating 0%, 0%, and 2%, respectively, of the aggregate dollar
amount of transactions involving the payment of brokerage commissions by Special
Equities II. Of the aggregate brokerage commissions paid during fiscal year
1996, Special Equities II paid $39,389 to brokers who furnished research
services, and such brokers effected transactions aggregating 7% of the aggregate
dollar amount of transactions involving the payment of brokerage commissions by
Special Equities II.
The Adviser may place brokerage transactions with brokers affiliated with the
distributor for Skyline, Funds Distributor, Inc. Commissions paid to such
brokers on any transaction will not exceed those paid by Skyline in similar
transactions to other brokers.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions are discussed in the Prospectus under the headings
"Purchasing Shares," "Redeeming Shares," "Shareholder Services," and "Net Asset
Value." All of that information is incorporated herein by reference.
You may purchase (or redeem) shares of the Portfolios through investment
dealers, banks, or other institutions. However, these institutions may charge
for their services or place limitations on the extent to which you may use the
services offered by Skyline. Skyline imposes no charges other than those
described in the Prospectus and this Statement of Additional Information if
shares are purchased (or redeemed) directly from Skyline.
Shares of the Portfolios may be purchased and redeemed through certain
financial services companies. Generally, such purchases and redemptions will be
effected without any transaction fee, provided that under certain circumstances
a broker may charge transaction fees. For accounting, servicing, and
distribution services provided by such company with respect to shares of the
Portfolios held by accounts at such company, the company will charge a fee of up
to .35% of the annual average value of those accounts, all of which fee is paid
by the Adviser.
NET ASSET VALUE. The net asset value of the shares of each Portfolio of
Skyline is determined as of the close of regular session trading on the New York
Stock Exchange (currently 3:00 p.m., central time) each day it is open for
trading. The net asset value per share of each Portfolio is determined by
dividing the value of all its securities and other assets, less its liabilities,
by the number of shares of the Portfolio outstanding.
Investments are stated at current value. Securities listed or admitted to
trading on a national securities exchange or the Nasdaq National Market are
valued at the last sales price or, if there has been no sales on the valuation
date, at the most recent bid price. Other securities traded over-the-counter are
valued at the last reported bid price. Money market instruments with sixty 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 will be valued at a fair value as determined in good faith
by or under the direction of Skyline's board of trustees.
The New York Stock Exchange is currently closed on weekends and on the
following holidays: New Year's Day, Washington's Birthday, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
12
<PAGE>
REDEMPTION IN KIND. With respect to each Portfolio, Skyline intends to pay
all redemptions in cash and is obligated to redeem shares solely in cash up to
the lesser of $250,000 or one percent of the net assets of the Portfolio during
any 90-day period for any one shareholder. However, redemptions in excess of
such limit may be paid wholly or partly by a distribution in kind of readily
marketable securities. If redemptions are made in kind, the redeeming
shareholders might incur brokerage fees in selling the securities received in
the redemptions.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders having shares of a Portfolio with a minimum
value of $5,000. The Withdrawal Plan provides for monthly or quarterly checks in
any amount not less than $100 (which amount is not necessarily recommended).
There are no separate charges to shareholders under the Withdrawal Plan.
Withdrawals are not dividends and to the extent that the amount of the checks
received under the Withdrawal Plan exceeds the amount of dividends or capital
gains distributions credited to the shareholder's account, the payment will
constitute a depletion of the principal in the shareholder's account.
Withdrawals made concurrently with purchases of additional shares may be
inadvisable because of tax consequences. A Withdrawal Plan may be terminated at
any time upon written notice by the shareholder or Skyline.
TAXES
Each Portfolio is a separate entity for purposes of determining federal tax
treatment. Skyline intends for each Portfolio to continue to qualify as a
"regulated investment company" under Subchapter M of the Internal Revenue Code,
and thus not be subject to federal income taxes on amounts which it distributes
to shareholders.
GENERAL INFORMATION
CUSTODIAN. Firstar Trust Company ("Firstar"), P.O. Box 701, Milwaukee,
Wisconsin 53201, acts as Custodian of the securities and other assets of
Skyline. As Custodian, Firstar is responsible for, among other things,
safeguarding and controlling Skyline's cash and securities, handling the receipt
and delivery of securities, and collecting interest and dividends on Skyline's
investments. Firstar also performs transfer agent and portfolio accounting
services for the Portfolios. Firstar is not an affiliate of the Adviser or its
affiliates.
AUDITORS. Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago,
Illinois 60606 serves as Skyline's independent auditors, providing services
including (i) audit of the annual financial statements, (ii) assistance and
consultation in connection with Securities and Exchange Commission filings, and
(iii) review of the annual income tax returns filed on behalf of each Portfolio.
DISTRIBUTOR. The shares of each Portfolio are offered for sale on a
continuous basis through Funds Distributor, Inc. ("Distributor") without any
sales commissions or charges to the Portfolios or to their shareholders. The
Chairman of the Distributor, and Chairman and Chief Executive Officer and the
majority shareholder of its parent corporation, Boston Institutional Group,
Inc., is Mr. William J. Nutt, the Chairman and Chief Executive Officer of AMG.
The Distributor acts pursuant to a written Distribution Agreement with Skyline
which continues from year to year, provided such continuance is approved
annually (i) by a majority of the trustees or by a majority of the outstanding
voting securities of the affected Portfolio and (ii) by a majority of the
trustees who are not parties to the Agreement or interested persons of any such
party. The Adviser pays, as a part of its agreement to pay all of the ordinary
operating expenses of the Portfolios, all expenses in connection with
registration of shares of the Portfolios with the Securities and Exchange
Commission and notice filing fees under the various state blue sky laws and
assumes the cost of preparation of prospectuses and other expenses. The Adviser
bears all sales and promotional expenses from its own resources.
13
<PAGE>
As agent, the Distributor offers shares of each Portfolio to investors in
states where the shares are available for sale, at net asset value, without
sales commissions or other sales load. The Distributor offers the Portfolios'
shares only on a best-efforts basis.
The Distributor or another broker affiliated with the Distributor may receive
brokerage commissions on purchases and sales of portfolio securities by the
Portfolios. Those amounts, if any, are described under "Portfolio Transactions
and Brokerage."
The Distributor is a selling agent for two series of Portico Funds, Inc. --
Money Market Fund and U.S. Government Money Market Fund. Those funds are the
money market funds for which shareholders may exchange their shares of the
Portfolios through the exchange privilege described in the Prospectus.
FINANCIAL STATEMENTS
Copies of the 1996 annual reports of Special Equities Portfolio and Special
Equities II accompany this Statement of Additional Information. Each report
contains financial statements, notes thereto, supplementary information entitled
"Financial Highlights" and a report of independent auditors, all of which (but
no other part of the reports) is incorporated herein by reference.
A copy of Skyline's Prospectus for Special Equities Portfolio and Special
Equities II and additional copies of the annual report for Special Equities
Portfolio and for Special Equities II may be obtained by writing to the address
shown on the cover page of this Statement of Additional Information, or by
telephoning one of the numbers shown on the cover page.
14
<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>
This page left blank intentionally.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
This page left blank intentionally.
ANNUAL REPORT - DECEMBER 31, 1996
<PAGE>
This page left blank intentionally.
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>
This page left blank intentionally.
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>
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Financial Statements included in Part A of this post-
effective amendment:
None.
(2) Financial Statements included in Part B of this
amendment:
(i) Skyline Special Equities Portfolio
(incorporated by reference to the following portions of
registrant's 1996 Skyline Special Equities Portfolio
Annual Report):
- Report of Independent Auditors
- Statement of Assets and Liabilities at December
31, 1996
- Statement of Operations for the year ended
December 31, 1996
- Statement of Changes in Net Assets for the years
ended December 31, 1996 and 1995
- Portfolio Holdings at December 31, 1996
- Notes to Financial Statements
(ii) Skyline Special Equities II
(incorporated by reference to the following portions of
registrant's 1996 Skyline Special Equities II Annual
Report):
- Report of Independent Auditors
- Statement of Assets and Liabilities at December
31, 1996
- Statement of Operations for the year ended
December 31, 1996
- Statement of Changes in Net Assets for the years
ended December 31, 1996 and 1995
- Portfolio Holdings at December 31, 1996
- Notes to Financial Statements
C-1
<PAGE>
Schedule I for each Portfolio has been omitted as the required
information is presented in the Portfolios Holdings at
December 31, 1996. Schedules II, III, IV, and V for each
Portfolio are omitted as the required information is not present.
(b) EXHIBITS:
Note: As used herein, "Registration Statement" means the registrant's
Registration Statement on Form N-1A, no. 33-11755. "Pre-effective
Amendment" refers to a pre-effective amendment to the Registration
Statement, and "Post-effective Amendment" refers to a post-effective
amendment to the Registration Statement.
1.1 Agreement and Declaration of Trust of the registrant (exhibit 1
to Post-effective Amendment no. 21*)
1.2 Amendment No. 1 to Agreement and Declaration of Trust
2 By-Laws of the registrant (exhibit 2 to Post-effective Amendment
no. 21*)
3 None
4.1 Share certificate for series designated Skyline Special Equities
Portfolio (exhibit 4.1 to Post-effective Amendment no. 21*)
4.2 Share certificate for series designated Skyline Special Equities
II (exhibit 4.2 to Post-effective Amendment no. 21*)
5.1 Investment Advisory Agreement between the registrant and Skyline
Asset Management, L.P., relating to Skyline Special Equities
Portfolio (exhibit 5.1 to Post-effective Amendment no. 21*)
5.2 Investment Advisory Agreement between the registrant and Skyline
Asset Management, L.P., relating to Skyline Special Equities II
(exhibit 5.2 to Post-effective Amendment no. 21*)
6 Distribution Agreement between the registrant and Funds
Distributor, Inc. (exhibit 6 to Post-effective Amendment no. 21*)
7 None
8 Custodian Agreement among the registrant, Skyline Asset
Management, L.P., and Firstar Trust Company (exhibit 8 to Post-
effective Amendment no. 21*)
9.1 Transfer Agent Agreement among the registrant, Skyline Asset
Management, L.P., and Firstar Trust Company, as amended (exhibit
9.1 to Post-effective Amendment no. 21*)
9.2 Fund Accounting Services Agreement among the registrant, Skyline
Asset Management, L.P., and Firstar Trust Company (exhibit 9.2 to
Post-effective Amendment no. 21*)
C-2
<PAGE>
10.1 Opinion and Consent of Counsel relating to Skyline Special
Equities Portfolio (exhibit 10.1 to Post-effective Amendment no.
21*)
10.2 Opinion and consent of counsel relating to Skyline Special
Equities II (exhibit 10.2 to Post-effective Amendment no. 21*)
11 Consent of Independent Auditors
12 None
13 Investment representation letter of initial purchaser of shares
of beneficial interest of the registrant (exhibit 13 to Post-
effective Amendment no. 21*)
14 Skyline Fund Individual Retirement Account Custodial Agreement
and Disclosure Statement and related applications (exhibit 14 to
Post-effective Amendment no. 21*)
15 None
16 Schedule for Computation of Performance Quotations (exhibit 16 to
Post-effective Amendment no. 21*)
18 None
19 Skyline Fund Account Application (exhibit 19 to Post-effective
Amendment no. 21*)
27.1 Financial Data Schedule -- Skyline Special Equities Portfolio
27.2 Financial Data Schedule -- Skyline Special Equities II
- ------------------
* Incorporated by reference
ITEM 25. Persons Controlled by or Under Common Control With Registrant.
The Registrant does not consider that there are any persons directly
or indirectly controlling, controlled by, or under common control with the
Registrant within the meaning of this item. The information in the Prospectus
under the caption "Management of Skyline" and in the Statement of Additional
Information under the caption "Management of Skyline" and in the first
paragraph under the caption "Investment Advisory Services" is incorporated by
reference.
ITEM 26. Number of Holders of Securities.
Number of Record Holders
Title of Series as of March 31, 1997
--------------- ------------------
Skyline Special Equities Portfolio 5,646
Skyline Special Equities II 4,387
C-3
<PAGE>
ITEM 27. Indemnification.
See Article Tenth of Registrant's Agreement and Declaration of Trust
which is incorporated by reference herein to exhibit no. 1 to the Registration
Statement. In addition, the Trust maintains a trustees and officers liability
insurance policy with maximum coverage of $2 million under which the Trust and
its trustees and officers will be named insureds.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to trustees,
officers, and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a trustee, officer
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer, or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 28. Business and Other Connections of Investment Adviser.
The information in the Statement of Additional Information under the
caption "Management of Skyline" is incorporated by reference. Prior to August
31, 1995, the officers of Skyline Asset Management, L.P. were officers or
employees of Mesirow Asset Management, Inc., the previous adviser to the Fund.
Affiliated Managers Group, Inc. ("AMG"), the general partner of Skyline Asset
Management, L.P., has during such time period been in the business of making
equity investments in investment management firms in which management personnel
retain a significant interest in the future of the business. AMG holds,
directly or indirectly, partnership or other equity interests in a number of
entities, each of which provides investment advice to a number of other
organizations and individuals.
C-4
<PAGE>
ITEM 29. Principal Underwriters.
(a) Funds Distributor, Inc. (the "Distributor") also acts as
principal underwriter for the following investment companies:
Waterhouse Investors Cash Management Fund, Inc.
Fremont Mutual Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc., d/b/a Harris Insight Funds
The Munder Funds Trust
The Munder Funds, Inc.
The Munder Framlington Funds Trust
The PanAgora Institutional Funds
BJB Investment Funds
Foreign Fund, Inc.
Burridge Funds
The JPM Advisor Funds
The JPM Institutional Funds
The JPM Pierpoint Funds
The JPM Series Trust
The JPM Series Trust II
LKCM Fund
Monetta Fund, Inc.
Monetta Trust
RCM Capital Funds, Inc.
RCM Equity Funds, Inc.
St. Clair Money Market Fund
WEBS Index Fund, Inc.
(b) The information required by this Item 29(b) with respect to each
director, officer, or partner of the Distributor is incorporated by reference to
Schedule A of Form BD filed by the Distributor with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (File No. 8-20518).
The principal business address of all officers and directors of the Distributor
is One Exchange Place, Boston, Massachusetts 02109.
(c) Not applicable
ITEM 30. Location of Accounts and Records.
(1) Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201
Rule 31a-1(a)
Rule 31a-1(b)(1), (2), (3), (5), (6), (7), (8)
C-5
<PAGE>
(2) Skyline Funds
311 South Wacker Drive, Suite 4500
Chicago, Illinois 60606
Rule 31a-1(a); Rule 31a-1(b)(9), (10), (11);
Rule 31a-1(d); Rule 31a-1(f); Rule 31a-2(a);
Rule 31a-2(c); Rule 31a-2(e)
ITEM 31. Management Services.
Not applicable.
ITEM 32. Undertakings.
(a)-(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago and State of Illinois on April
25, 1997.
SKYLINE FUNDS
By /s/ William M. Dutton
---------------------------------------
William M. Dutton, President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed below by the following
persons in the capacities and on the date indicated.
/s/ William L. Achenbach Trustee )
- -------------------------- )
William L. Achenbach )
)
)
/s/ William M. Dutton Trustee )
- -------------------------- President (principal )
William M. Dutton executive officer) )
)
)
)
/s/ Paul J. Finnegan Trustee )
- -------------------------- ) April 25, 1997
Paul J. Finnegan )
)
)
)
/s/ Stephen F. Kendall Trustee )
- -------------------------- )
Stephen F. Kendall )
)
)
)
/s/ David A. Martin Trustee )
- -------------------------- )
David A. Martin )
)
)
)
/s/ Scott C. Blim Secretary and Treasurer )
- -------------------------- (principal accounting )
Scott C. Blim and financial officer) )
<PAGE>
Index of Exhibits Filed with this Amendment
-------------------------------------------
Exhibit
Number Exhibit
- ------- --------
1.2 Amendment No. 1 to Agreement and Declaration of Trust
11 Consent of Independent Auditors
27.1 Financial Data Schedule -- Skyline Special Equities Portfolio
27.2 Financial Data Schedule -- Skyline Special Equities II
<PAGE>
SKYLINE FUND
AMENDMENT NO. 1 TO
AGREEMENT AND DECLARATION OF TRUST
Amendment No. 1 to the Agreement and Declaration of Trust dated April 24,
1997 (amending the Agreement and Declaration of Trust dated February 4, 1987
(the "Agreement")) of Skyline Fund (the "Trust"), made at Chicago, Illinois,
this 24th day of April, 1997.
WITNESSETH:
WHEREAS, Article Eleventh of the Agreement of the Trust provides that
except when otherwise required by the Investment Company Act of 1940, the
Agreement may be amended at any time, by a majority of the Trustees of the
Trust; and
WHEREAS, a majority of Trustees of the Trust have duly approved this
amendment to the Agreement in accordance with the provisions of the Agreement
and have authorized the same to be filed with the Secretary of State of the
Commonwealth of Massachusetts and the Clerk of the City of Boston.
NOW, THEREFORE, the undersigned William M. Dutton, the duly elected and
serving President of the Trust, pursuant to the authorization described above,
hereby declares that the Agreement is amended as follows:
Effective as of April 25, 1997, Article First of the Agreement
and Declaration of Trust of Skyline Fund is amended and restated to
read as follows:
FIRST: NAME.
The name of this Trust is SKYLINE FUNDS (the "Trust").
IN WITNESS WHEREOF, the undersigned, pursuant to the direction of the
Trustees as evidenced by a resolution of a majority of the Trustees duly adopted
by written consent on April 23, 1997, has hereunto set his hand as of the day
and year first above written.
/s/ William M. Dutton
------------------------------
Name: William M. Dutton
Title: President
STATE OF ILLINOIS )
)
COUNTY OF COOK )
Then personally appeared the above-named William M. Dutton, as President of
the Trust, and acknowledged this instrument to be his free act and deed this
24th day of April, 1997.
/s/ Scott C. Blim
-------------------------------
Notary Public
My Commission Expires: 3-4-2000
"OFFICIAL SEAL"
SCOTT C. BLIM
NOTARY PUBLIC, STATE OF ILLINOIS
MY COMMISSION EXPIRES 3-4-2000
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "General Information - Auditors" and to the use of our reports
with respect to Special Equities Portfolio and Special Equities II dated
January 20, 1997 in the Registration Statement of Skyline Funds on Form N-1A and
their incorporation by reference in the related Statement of Additional
Information filed with the Securities and Exchange Commission in this Post-
Effective Amendment No. 22 to the Registration Statement under the Securities
Act of 1933 (Registration No. 33-11755) and in this Amendment No. 24 to the
Registration Statement under the Investment Company Act of 1940 (Registration
No. 811-5022).
Ernst & Young LLP
Chicago, Illinois
April 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM N-SAR
12/31/96 AND 12/31/96 AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> SKYLINE SPECIAL EQUITIES PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 194,929
<INVESTMENTS-AT-VALUE> 223,186
<RECEIVABLES> 2,597
<ASSETS-OTHER> 78
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 225,861
<PAYABLE-FOR-SECURITIES> 5,813
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 568
<TOTAL-LIABILITIES> 6,381
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 187,550
<SHARES-COMMON-STOCK> 12,087
<SHARES-COMMON-PRIOR> 10,418
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,674
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 28,256
<NET-ASSETS> 219,480
<DIVIDEND-INCOME> 1,490
<INTEREST-INCOME> 500
<OTHER-INCOME> 0
<EXPENSES-NET> 2,527
<NET-INVESTMENT-INCOME> (537)
<REALIZED-GAINS-CURRENT> 36,986
<APPREC-INCREASE-CURRENT> 8,160
<NET-CHANGE-FROM-OPS> 44,609
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 33,540
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,542
<NUMBER-OF-SHARES-REDEEMED> 3,749
<SHARES-REINVESTED> 1,876
<NET-CHANGE-IN-ASSETS> 44,581
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,852
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,508
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,527
<AVERAGE-NET-ASSETS> 170,240
<PER-SHARE-NAV-BEGIN> 16.79
<PER-SHARE-NII> (.04)
<PER-SHARE-GAIN-APPREC> 5.02
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 3.61
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.16
<EXPENSE-RATIO> 1.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM N-SAR
12/31/96 AND 12/31/96 AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMEMTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> SKYLINE SPECIAL EQUITIES II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 93,384
<INVESTMENTS-AT-VALUE> 106,182
<RECEIVABLES> 1,153
<ASSETS-OTHER> 6
<OTHER-ITEMS-ASSETS> 8
<TOTAL-ASSETS> 107,349
<PAYABLE-FOR-SECURITIES> 1,552
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 464
<TOTAL-LIABILITIES> 2,016
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 88,610
<SHARES-COMMON-STOCK> 8,820
<SHARES-COMMON-PRIOR> 7,900
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,925
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,798
<NET-ASSETS> 105,333
<DIVIDEND-INCOME> 858
<INTEREST-INCOME> 357
<OTHER-INCOME> 0
<EXPENSES-NET> 1,450
<NET-INVESTMENT-INCOME> (235)
<REALIZED-GAINS-CURRENT> 20,382
<APPREC-INCREASE-CURRENT> 2,418
<NET-CHANGE-FROM-OPS> 22,565
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 34
<DISTRIBUTIONS-OF-GAINS> 16,359
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,685
<NUMBER-OF-SHARES-REDEEMED> 2,164
<SHARES-REINVESTED> 1,398
<NET-CHANGE-IN-ASSETS> 16,129
<ACCUMULATED-NII-PRIOR> 34
<ACCUMULATED-GAINS-PRIOR> 137
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,428
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,450
<AVERAGE-NET-ASSETS> 95,305
<PER-SHARE-NAV-BEGIN> 11.29
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 2.94
<PER-SHARE-DIVIDEND> .01
<PER-SHARE-DISTRIBUTIONS> 2.26
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.94
<EXPENSE-RATIO> 1.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
