<PAGE>
[LOGO]
SKYLINE SPECIAL EQUITIES PORTFOLIO
INVESTING IN SMALL-SIZED COMPANIES
- ----------------------- STRATEGY
- Value orientation - low price/earnings ratio-
20% plus discount to the market
- Attention to growth - forecasted EPS growth in
the 10% to 20% range
- Focus on "neglected" companies - limited
Wall Street research coverage
- Market cap range of $100 million to $700 million
JUNE 30, 1997
<PAGE>
LETTER FROM WILLIAM M. DUTTON, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
July 18, 1997
Dear Shareholder:
We are pleased to report that Skyline Special Equities Portfolio showed a gain
of 19.3% in the June quarter compared to a gain of 16.2% for the Russell 2000
Index, as the net asset value closed the period at $22.19 per share. For the
first six months of the year, the Fund gained 22.2% compared to a gain of only
10.2% for the Russell 2000 Index. The strong results for the quarter were due to
a strong stock market and good stock selection. For the six months, results were
also aided by advantageous sector weightings and a favorable environment early
in the year for our small cap value investment style.
As most of you are aware, the Fund recently completed its tenth full year of
operation. The table below shows the performance of the Fund for various time
frames since its inception in April 1987. As you can see, the Fund has
outperformed the small cap market over all time frames and has one of the best
long term track records in the industry. In fact, for the ten years ending in
June, the Fund ranks as the sixth best performing diversified stock fund, as
ranked by Lipper Analytical Services, Inc. One of the main reasons for this
strong performance is that the Fund has done extremely well during periods when
our small-cap value investment style has been in favor. Since the Fund's
inception in 1987, there have been three time periods that our investment style
has been in favor: 1988, 1992-93, and 1996-97. In each of these periods, the
Fund strongly outperformed the market. Also important is that in most years
where our style has been out of favor, the Fund still performed reasonably well
compared to the Russell 2000 Index.
PERFORMANCE
SPECIAL
EQUITIES RUSSELL 2000
Qtr2 1997 19.30% 16.21%
YTD 1997 22.19 10.20
1 yr. 38.08 16.33
3 yrs. 23.20 20.06
5 yrs. 23.29 17.88
10 yrs. 18.37 11.14
Since Inception 18.44 11.18
MARKET REVIEW
The big move upward in the stock market in the second quarter can be attributed
to a strong economy, excellent corporate earnings, low inflation, and a belief
by investors that interest rates will not move higher. Early in the year,
investors had worried about interest rate increases after the Federal Reserve
Board raised a key
SEMI-ANNUAL REPORT - JUNE 30, 1997 1
<PAGE>
interest rate in an effort to cool off the economy. During the second quarter, a
consensus developed among investors that additional rate increases would not
occur, setting the stage for a powerful rally when corporate earnings appeared
to be better than expected.
During the quarter, the advance was very broad in the small cap market, with all
economic sectors in the Russell 2000 showing gains over 10%. The technology
sector led all groups with an increase of over 23%. For the six months, however,
sector performance was very mixed, with certain sectors showing gains of 15%-20%
while other sectors showed only minor advances. The top performing sectors for
the six months were the financial services sector and certain economically
sensitive areas. The technology sector, despite its big return in the second
quarter, actually recorded a loss for the first half due to its extremely weak
showing in the first quarter.
Unlike the recent past, the second quarter showed very similar results among
small and large stocks and among investment styles. Small cap stocks, as
measured by the Russell 2000 Index, trailed large cap stocks by only a slim
margin and actually outperformed large stocks since the end of April. In terms
of investment styles, growth stock managers had an edge on value managers, but
both styles showed solid returns for the period. For the six months, large
stocks still have a significant lead over small stocks, and small cap
value-oriented funds have a comfortable lead over small cap growth-oriented
funds due to results from the first quarter.
FUND REVIEW
As noted earlier, the Fund registered a gain of approximately 19.3% in the
quarter compared to a gain of 16.2% for the Russell 2000 Index. While sector
weightings proved slightly positive in the period, the main reason for the
outperformance was good stock selection. Top performing stocks came from a
variety of sectors, with the top ten stocks falling in six different economic
sectors. The Fund benefited from two stocks that received buyout offers at
prices significantly above market prices. Also, there were very few problem
stocks during the quarter.
For the six months, the Fund showed a gain of over 22% compared to a gain of
10.2% for the Russell 2000 Index. Again, stock selection was quite strong,
leading the Fund to perform better than the Russell 2000 in nearly every
economic sector. Top performing stocks came from a range of sectors, with the
top ten performers falling in six different sectors. Sector weightings had a
larger impact on performance for the six months. The Fund was heavily weighted
in sectors that performed well, such as the financial services and consumer
sectors, and underweighted in sectors that performed poorly, such as technology
and health care.
The Fund has been heavily weighted in economically sensitive stocks for most of
the past few years. This positioning proved to be very beneficial over the last
year and is a major reason for the strong results in 1997. A strong economy,
such as the one we have had over the past year, creates lots of stock market
opportunities because many companies are showing improving results. We have
identified many such opportunities over recent quarters, particularly in the
consumer and industrial areas of the economy.
2 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
Another major investment theme in the Fund today is a "restructuring" theme.
Over the past year, we have identified a number of small cap companies that are
in the process of major corporate restructuring. Usually these companies have a
new CEO that has recently joined the company from a larger corporation. In most
cases, the company in which we own stock has a good product or service and a
strong position in its market but for one reason or another has not been
generating an adequate level of profitability. The new CEO, who usually has an
attractive stock option package, is focused on increasing profitability.
Examples in the Fund include Borg-Warner Security Corp., a guard and alarm
services company whose new CEO came from Emerson Electric Co.; MagneTek, an
electrical equipment company whose new CEO came from AlliedSignal Inc.; and
Michaels Stores, a retailer whose new CEO had major positions with Target and
Lowe's Companies, Inc.
Many of the stocks that fit this "restructuring" theme do not have low
price/earnings ratios, and consequently, the P/E of the Fund is higher than
normal today. However, we believe these stocks qualify as value-oriented stocks
because they are quite cheap on other measures such as price/sales, price/book
value, or price/potential earnings. In all cases, they are trading at low
multiples of the earnings that should be attained once the restructuring is
complete. While we have always owned a few stocks that fit this definition of
"value," the Fund has a far higher weighting today in these situations.
OUTLOOK
Our outlook is somewhat mixed at the present time. On the positive side, small
cap stocks appear relatively inexpensive compared to large cap stocks. Valuation
measures such as price/earnings and price/book value are low on a relative
basis. Also, the economy is strong, which has historically been positive for
small cap stocks.
On the other hand, valuation for the entire market is high, leaving little room
for absolute multiple expansion going forward. At the same time, the Federal
Reserve Board appears concerned that the economy is too strong and may very well
do what is necessary to slow it down. This would be a negative for our
investment approach, since many of our holdings are economically sensitive.
Perhaps most important, we believe that your individual stock holdings have good
appreciation potential from current levels. Most holdings possess excellent
risk/reward characteristics, with relatively low valuations and above-average
earnings growth prospects. If the economy can continue to show solid growth, we
believe the Fund will perform quite well on both an absolute and relative basis.
Sincerely,
/s/ William M. Dutton
SEMI-ANNUAL REPORT - JUNE 30, 1997 3
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Qtr2 YTD Since
1997 1997 1 yr. 3 yrs. 5 yrs. 10 yrs. Inception(2)
<S> <C> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES 19.30 22.19 38.08 23.20 23.29 18.37 18.44
RUSSELL 2000 16.21 10.20 16.33 20.06 17.88 11.14 11.18
S&P 500 17.45 20.53 34.75 28.94 19.80 14.61 15.05
<CAPTION>
CALENDAR YEARS
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES 30.4 13.8 -1.2 22.9 42.5 47.4 -9.3 24.0 29.7 -16.9
RUSSELL 2000 16.5 28.4 -1.8 18.9 18.4 46.1 -19.5 16.2 24.9 -24.3
S&P 500 23.3 37.5 1.3 10.0 7.7 30.6 -3.2 31.4 16.5 -12.0
</TABLE>
SECTOR WEIGHTINGS (AS OF JUNE 30, 1997)
- --------------------------------------------------------------------------------
[CHART]
AUTOS & TRANSPORTATION 13.0%
CASH 4.2%
TECHNOLOGY 1.3%
PRODUCER DURABLES 11.3%
CONSUMER DISCRETIONARY 25.4%
MATERIALS & PROCESSING 15.1%
HEALTH CARE 4.6%
CONSUMER STAPLES 0.5%
ENERGY 4.6%
FINANCIAL SERVICES 20.0%
4 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
SECTOR PERFORMANCE (AS OF JUNE 30, 1997)
- --------------------------------------------------------------------------------
2Q 1997 YEAR TO DATE
SPECIAL RUSSELL SPECIAL RUSSELL
EQUITIES 2000 EQUITIES 2000
TECHNOLOGY 64.5% 23.5% 74.7% -0.1%
---------------------------------------------------
FINANCIAL SERVICES 26.0 13.3 28.4 13.6
---------------------------------------------------
PRODUCER DURABLES 24.9 23.2 32.1 17.0
---------------------------------------------------
ENERGY 20.9 15.0 9.7 3.3
---------------------------------------------------
CONSUMER DISCRETIONARY 20.6 18.7 23.9 13.4
---------------------------------------------------
MATERIALS & PROCESSING 19.9 11.2 27.3 8.3
---------------------------------------------------
UTILITIES 18.4 12.2 22.4 6.7
---------------------------------------------------
AUTOS & TRANSPORTATION 10.2 20.2 9.6 19.0
---------------------------------------------------
HEALTH CARE 4.4 13.4 5.3 3.9
---------------------------------------------------
OTHER 0.0 20.9 0.0 19.1
---------------------------------------------------
CONSUMER STAPLES -35.4 16.5 -17.9 19.2
---------------------------------------------------
SEMI-ANNUAL REPORT - JUNE 30, 1997 5
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
SPECIAL
EQUITIES RUSSELL 2000 S&P 500
P/E RATIO (MEDIAN) 16.5 22.6 20.9
PRICE/BOOK 2.27 2.62 3.51
PRICE/SALES 0.81 1.35 1.52
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 18.0% 22.0% 15.2%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $420 million $620 million $33 billion
PORTFOLIO VALUE $348 million $792 billion $6,839 billion
NUMBER OF HOLDINGS 78 2,000 500
- --------------------------------------------------------------------------------
TICKER SYMBOL: SKSEX
CUSIP #: 830833208
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
COMSTOCK RESOURCES, INC. (CRK)
Comstock Resources explores for and produces natural gas in the Texas/Louisiana
region. Unlike many in the industry, Comstock generates strong net income. This
enables the company to reinvest in its business by drilling more wells or
acquiring more property without diluting current shareholders' interests or
leveraging the balance sheet. In fact, the company plans to grow production 20%
or more in each of the next two years by drilling low-risk wells on its
existing, producing properties. Despite this low-risk growth strategy, the
company's stock sells at a low multiple of earnings per share, particularly
compared to its peer group, of which many firms do not even generate much net
income.
SYNTHETIC INDUSTRIES, INC. (SIND)
Synthetic Industries is a leading producer of polypropylene-based fabrics and
fibers for the carpet, construction, and environmental markets. SIND's low cost
manufacturing operations and proximity to major customers have allowed the
company to achieve market share gains in its core carpet backing market.
In addition, SIND has been very successful in applying its expertise in plastic
fibers to new markets. Examples of new products that address more rapidly
growing markets include solid waste landfill liners and FIBERMESH, a low cost
method of reinforcing concrete. Despite SIND's track record of steady earnings
growth and excellent prospects, the company sells at only 10.8x fiscal 1997
earnings per share, a significant discount to its competitors and the market as
a whole.
6 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
TOP TEN HOLDINGS % OF NET ASSETS
- --------------------------------------------------------------------------------
FURON COMPANY
Polymer-based products 2.6%
BRYLANE INC.
Specialty catalogs 1.9%
CHICAGO BRIDGE & IRON CO. N.V.
Maker of steel tanks 1.9%
DELPHI FINANCIAL GROUP, INC.
Accident & health insurance 1.9%
IHOP CORP.
Restaurant operator 1.8%
CITATION CORP.
Castings manufacturer 1.8%
ALLIED GROUP, INC.
Personal lines insurance 1.8%
INTERPOOL, INC.
Container leasing firm 1.7%
AMERICAN HERITAGE LIFE INVESTMENT
Payroll-deduction plans 1.7%
LANDSTAR SYSTEM, INC.
Truckload carrier 1.7%
TOP TEN HOLDINGS 18.8%
NOTES TO PERFORMANCE
(1) The performance for the one, three, five, and ten years ended June 30,
1997, and for the period April 23, 1987 (inception) through June 30, 1997,
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 fund characteristics are compiled by Frank Russell Company.
Sources: Lipper Analytical Services & Frank Russell Company.
(2) Return is calculated from the Fund's inception on April 23, 1987.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor Inc.
SEMI-ANNUAL REPORT - JUNE 30, 1997 7
<PAGE>
PORTFOLIO HOLDINGS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------- --------- -----------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 12.0%
AUTO RELATED - 4.1%
APS Holding Corp.(a) Auto parts distributor 303,100 $ 2,652,125
Excel Industries, Inc. OEM auto parts supplier 247,300 4,822,350
Intermet Corp. Metal castings 220,500 3,541,781
Standard Products Co. OEM auto parts supplier 134,700 3,401,175
-----------
14,417,431
OTHER TRANSPORTATION - 5.2%
Interpool, Inc. Container leasing firm 402,800 5,941,300
Kitty Hawk, Inc.(a) Air freight services 239,000 3,585,000
Monaco Coach Corp.(a) Recreational vehicles mfgr. 139,500 3,382,875
Pittston Burlington Group Air freight services 183,200 5,152,500
-----------
18,061,675
TRUCKING - 2.7%
Landstar System, Inc.(a) Truckload carrier 206,600 5,810,625
USFreightways Corp. Less than truckload carrier 138,800 3,591,450
-----------
9,402,075
-----------
TOTAL AUTOS & TRANSPORTATION 41,881,181
CONSUMER DISCRETIONARY - 25.4%
APPAREL/TEXTILES - 1.4%
Kellwood Co. Apparel maker 176,200 4,889,550
COMMERCIAL SERVICES - 4.7%
Borg-Warner Security Corp. Alarm/guard services 241,500 4,316,812
CB Commercial Real Estate
Services(a) Real estate related svcs. 159,100 4,832,662
Harland (John H.) Co. Check printing 182,200 4,156,438
New England Business
Service, Inc. Business forms firm 112,800 2,968,050
-----------
16,273,962
CONSUMER PRODUCTS/SERVICES - 6.5%
Carmike Cinemas, Inc.(a) Cinema operator 128,200 4,198,550
Furniture Brands
International, Inc.(a) Furniture manufacturer 226,200 4,382,625
Harman International
Industries, Inc. Audio equipment 135,700 5,716,363
Libbey Inc. Glass tableware 148,700 5,204,500
Oneida Ltd. Tableware/flatware 123,100 3,285,231
-----------
22,787,269
</TABLE>
8 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------- --------- -----------
<S> <C> <C> <C>
RESTAURANTS - 3.2%
IHOP Corp.(a) Restaurant operator 203,100 $ 6,296,100
Sonic Corp. Fast-food restaurants 218,600 4,809,200
-----------
11,105,300
RETAIL - 9.6%
Aaron Rents, Inc. Furniture store operator 310,300 4,150,262
Brylane Inc.(a) Specialty catalogs 170,700 6,582,619
Fingerhut Companies, Inc. Catalog retailer 245,500 4,280,906
Heilig-Meyers Co. Furniture store operator 249,900 4,904,288
Michaels Stores, Inc.(a) Arts & crafts stores 240,100 5,087,119
Tractor Supply Co.(a) Farm-related products 253,900 4,570,200
Zale Corp.(a) Jewelry retailer 185,700 3,679,181
-----------
33,254,575
-----------
TOTAL CONSUMER DISCRETIONARY 88,310,656
CONSUMER STAPLES - 0.5%
ProSource, Inc.(a) Foodservice distribution 225,100 1,603,838
ENERGY - 4.6%
EXPLORATION & PRODUCTION - 2.1%
Comstock Resources, Inc.(a) Oil & gas producer 366,300 3,823,256
Monterey Resources, Inc. Oil & gas producer 224,600 3,340,925
-----------
7,164,181
OTHER ENERGY - 2.5%
MarkWest Hydrocarbon, Inc.(a) Natural gas processing 236,600 3,549,000
Willbros Group Inc.(a) Engineering/const. firm 329,800 5,235,575
-----------
8,784,575
-----------
TOTAL ENERGY 15,948,756
FINANCIAL SERVICES - 20.0%
BANKS/THRIFTS - 2.2%
Community First
Bankshares, Inc. North Dakota-based bank 89,300 3,426,887
Sovereign Bancorp, Inc. East Coast savings & loan 267,020 4,072,055
-----------
7,498,942
LIFE INSURANCE - 3.1%
American Heritage Life
Investment Payroll-deduction plans 179,200 5,913,600
FBL Financial Group, Inc. Farm Bureau endorsed 127,200 4,801,800
-----------
10,715,400
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1997 9
<PAGE>
PORTFOLIO HOLDINGS AS OF JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------- --------- -----------
<S> <C> <C> <C>
OTHER FINANCIAL SERVICES - 2.7%
MoneyGram Payment
Systems Inc.(a) Wire transfer services 297,400 $4,684,050
Western National Corp. Retirement annuities 181,100 4,855,744
-----------
9,539,794
OTHER INSURANCE - 12.0%
Allied Group, Inc. Personal lines insurance 162,250 6,165,500
Blanch (E.W.) Holdings, Inc. Reinsurance brokerage 155,700 4,155,244
Chartwell Re Corporation Property & casualty reinsur. 113,200 3,396,000
Delphi Financial Group, Inc.(a) Accident & health insur. 168,706 6,495,181
Financial Security Assurance
Holdings Municipal bond insurance 106,700 4,154,631
Fremont General Corp. Workers' comp. insurance 109,500 4,407,375
Horace Mann Educators Corp. Property & casualty insur. 88,300 4,326,700
PennCorp Financial
Group, Inc. Life & health insurance 122,800 4,727,800
SCPIE Holdings Inc. Medical malpractice insur. 142,700 3,968,844
-----------
41,797,275
-----------
TOTAL FINANCIAL SERVICES 69,551,411
HEALTH CARE - 4.6%
HEALTH CARE SERVICES - 3.0%
Sierra Health Services, Inc.(a) Health maintenance org. 101,900 3,184,375
Trigon Healthcare, Inc.(a) Health maintenance org. 176,700 4,284,975
United Payors & United
Providers, Inc.(a) Health care intermediary 219,100 2,903,075
-----------
10,372,425
MEDICAL EQUIPMENT/PRODUCTS - 1.6%
Marquette Medical
Systems, Inc.(a) Monitoring equipment 150,700 3,315,400
Vital Signs, Inc. Disposable medical prod. 141,100 2,478,069
-----------
5,793,469
-----------
TOTAL HEALTH CARE 16,165,894
MATERIALS & PROCESSING - 15.1%
BUILDING/CONSTRUCTION PRODUCTS - 4.9%
Ameron International Corp. Concrete pipe/coatings 76,300 4,320,487
Chicago Bridge &
Iron Co. N.V. Maker of steel tanks 294,000 6,504,750
Dayton Superior Corp.(a) Concrete accessories 196,700 2,507,925
Interface, Inc. Carpet producer 170,200 3,765,675
-----------
17,098,837
</TABLE>
10 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------- --------- -----------
<S> <C> <C> <C>
INDUSTRIAL PRODUCTS - 3.9%
Brady (W.H.) Co. Misc. specialty products 153,700 $4,457,300
Furon Company Polymer-based products 284,600 8,929,325
-----------
13,386,625
METAL FABRICATIONS - 1.8%
Citation Corp.(a) Castings manufacturer 363,700 6,228,363
PACKAGING - 2.3%
BWAY Corp.(a) Metal cans/containers 143,200 3,329,400
Shorewood Packaging Corp. Consumer & software prod. 210,000 4,777,500
-----------
8,106,900
SPECIALTY CHEMICALS - 2.2%
Cambrex Corp. Synthetic chemicals 7,600 301,150
Lilly Industries, Inc. Industrial coatings/chem. 174,200 3,505,775
Synthetic Industries, Inc.(a) Industrial fibers 189,600 4,005,300
-----------
7,812,225
-----------
TOTAL MATERIALS & PROCESSING 52,632,950
PRODUCER DURABLES - 11.3%
MACHINERY - 4.7%
Alamo Group, Inc. Grounds maint. equip. 124,600 2,593,237
Applied Industrial
Technologies, Inc. Industrial prod. distributor 152,700 5,497,200
Binks-Sames Corp. Spray coating equipment 86,700 4,009,875
Brown & Sharpe
Manufacturing Co.(a) Metrology instruments 277,500 4,197,188
-----------
16,297,500
OTHER PRODUCER DURABLES - 6.6%
AFC Cable Systems, Inc. Maker of cable equipment 88,200 2,381,400
General Cable Corp. Wire & cable producer 203,100 5,204,437
LSI Industries Inc. Lighting/graphics products 179,700 2,425,950
MagneTek, Inc.(a) Integrated electrical prod. 301,400 5,010,775
MotivePower Industries Inc.(a) Locomotive components 214,000 3,424,000
TriMas Corp. Diversified manufacturer 165,100 4,643,438
-----------
23,090,000
-----------
TOTAL PRODUCER DURABLES 39,387,500
TECHNOLOGY - 1.3%
BancTec Inc. Financial software/equip. 170,200 4,414,563
-----------
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1997 11
<PAGE>
PORTFOLIO HOLDINGS AS OF JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Principal Market
Description Amount Value
--------------------- -------------- ------------
<S> <C> <C> <C>
TOTAL COMMON STOCKS - 94.8%
(Cost: $265,822,879) $329,896,749
CONVERTIBLE BOND
AUTOS & TRANSPORTATION - 1.0%
Atlantic Coast Airlines, Inc.(d)
7.00% Due 7/1/04 Regional airline $ 3,393,000 3,545,685
-----------
TOTAL CONVERTIBLE BOND - 1.0%
(Cost: $3,412,312) 3,545,685
MONEY MARKET INSTRUMENTS
VARIABLE RATE DEMAND NOTES(b)
Yield 5.23% to 5.30%
due August 1997 to February 1998
American Family Financial Services 1,848,624
General Mills, Inc. 64,361
Johnson Controls, Inc. 3,798,290
Pitney Bowes Credit Corp. 731,262
Warner-Lambert Co. 3,049,296
Wisconsin Electric Power Corp. 854,961
-----------
10,346,794
COMMERCIAL PAPER(c)
Associates First Capital, Inc., 6.10% due 7/01/97 5,800,000
-----------
TOTAL MONEY MARKET INSTRUMENTS - 4.7%
(Cost: $16,146,794) 16,146,794
-----------
TOTAL INVESTMENTS - 100.5%
(Cost: $285,381,985) 349,589,228
OTHER LIABILITIES LESS ASSETS - (0.5%) (1,616,230)
-----------
NET ASSETS - 100.0% $347,972,998
-----------
-----------
</TABLE>
12 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
- -------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Variable rate demand notes. Interest rates are reset every seven days.
Rates disclosed represent rates in effect on June 30, 1997.
(c) Commercial paper is traded at par value.
(d) The following security may require registration under the Securities Act of
1933 or an exemption there from in order to effect sale in ordinary course of
business. This security is valued at fair market supplied by a pricing source or
brokers, if not available, then determined in good faith by the Board of
Trustees of the Fund. At June 30, 1997, the aggregate value of the Fund's
restricted security was $3,545,685, which represented 1.0% of net assets.
SECURITY DESCRIPTION DATE OF ACQUISITION PRINCIPAL AMOUNT UNIT COST
- --------------------------------------------------------------------------------
Atlantic Coast Airlines, Inc. June 27, 1997 $3,393,000 $100.57
7.00%, 2004
- --------------------------------------------------------------------------------
Based on cost of investments for federal income tax purposes of $285,381,985, on
June 30, 1997, net unrealized appreciation was $64,207,243, consisting of gross
unrealized appreciation of $69,868,179 and gross unrealized depreciation of
$5,660,936.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1997 13
<PAGE>
STATEMENT OF ASSETS & LIABILITIES AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Cost: $285,381,985) $ 349,589,228
Cash 3,299
Receivable for:
Securities sold $ 3,099,586
Dividends and interest 151,888
Shares sold 802,748 4,054,222
------------ -------------
Total assets 353,646,749
LIABILITIES & NET ASSETS
Payable for:
Securities purchased 4,656,312
Shares redeemed 613,690
Advisory fee 403,364
Trustees' fee 385 5,673,751
------------ -------------
Net assets applicable to shares
outstanding $ 347,972,998
-------------
-------------
Shares outstanding--no par value
(unlimited number of shares authorized) 15,683,420
-------------
-------------
PRICING OF SHARES
Net asset value, offering price, and
redemption price per share $ 22.19
-------------
-------------
ANALYSIS OF NET ASSETS
Paid-in capital $ 256,085,750
Undistributed net realized gain on
sales of investments 28,214,662
Unrealized appreciation of investments 64,207,243
Undistributed net investment loss (534,657)
-------------
Net assets applicable to shares outstanding $ 347,972,998
-------------
-------------
See accompanying notes to financial statements.
14 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
Investment income:
Dividends $ 1,098,604
Interest 420,295
-------------
Total investment income 1,518,899
Expenses:
Investment advisory fee 2,044,160
Fees to unaffiliated trustees 9,396
-------------
Total expenses 2,053,556
-------------
Net investment loss (534,657)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 24,540,982
Net change in unrealized appreciation 35,950,837
-------------
Net realized and unrealized gain on investments 60,491,819
-------------
Net increase in net assets resulting from operations $ 59,957,162
-------------
-------------
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1997 15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Six Months Ended
6/30/97 Year Ended
(unaudited) 12/31/96
---------------- -------------
From operations:
Net investment loss $ (534,657) $ (537,572)
Net realized gain on sales of
investments 24,540,982 36,985,981
Net change in unrealized appreciation 35,950,837 8,160,180
------------- -------------
Net increase in net assets resulting
from operations 59,957,162 44,608,589
Distributions to shareholders from
net realized gains - (33,540,295)
From share transactions:
Proceeds from shares sold 96,600,944 68,600,112
Reinvestment of capital gain
distributions - 32,987,339
Payments for shares redeemed (28,065,484) (60,788,388)
Redemption in-kind - (7,286,453)
------------- -------------
Net increase in net assets
resulting from share transactions 68,535,460 33,512,610
------------- -------------
Total increase in net assets 128,492,622 44,580,904
Net assets at beginning of period 219,480,376 174,899,472
------------- -------------
Net assets at end of period $347,972,998 $219,480,376
------------- -------------
------------- -------------
See accompanying notes to financial statements.
16 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended 6/30/97 Years ended December 31
(unaudited) 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 18.16 $ 16.79 $ 15.64 $ 17.83 $ 17.12
-------- -------- -------- -------- --------
Income from Investment
Operations
Net investment loss (0.03) (0.04) (0.06) (0.08) (0.09)
Net realized and unrealized
gain (loss) on investments 4.06 5.02 2.21 (0.18) 3.94
-------- -------- -------- -------- --------
Total from Investment
Operations 4.03 4.98 2.15 (0.26) 3.85
-------- -------- -------- -------- --------
Less distributions from net
realized gains on investments - (3.61) (1.00) (1.93) (3.14)
-------- -------- -------- -------- --------
Net asset value at end of period $ 22.19 $ 18.16 $ 16.79 $ 15.64 $ 17.83
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return 22.19%(b) 30.37% 13.83% (1.15%) 22.85%
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.49%(a) 1.51% 1.51% 1.49% 1.48%
Ratio of net investment
loss to average net
assets (0.38%)(a) (0.32%) (0.35%) (0.49%) (0.54%)
Fund turnover rate 72%(a) 130% 71% 82% 104%
Net assets, end of period
(in thousands) $347,973 $219,480 $174,899 $202,771 $228,011
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Average commission rate paid on stock transactions for the six months ended June
30, 1997 was $0.0599 per share.
Note: Total return does not reflect the effect of any sales charges which may
have been previously charged.
(a) Ratios have been determined on an annualized basis.
(b) For the six months ended June 30, 1997.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1997 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Skyline Funds are an open-ended, diversified investment management company which
consists of Special Equities Portfolio and Special Equities II. The Funds
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 ("Fund").
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at market 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 and commercial
paper are valued at cost which equals market value. 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 Funds' 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.
- - FUND SHARE VALUATION - Fund 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. Central 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 Fund outstanding.
- - FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund'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 Fund are allocated to
that Fund. Other Fund expenses, such as trustees' fees, are allocated between
the two Skyline Funds.
18 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
- --------------------------------------------------------------------------------
2
TRANSACTIONS WITH AFFILIATES
The Fund'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
Fund's ordinary operating expenses, the Fund pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total advisory fee charged for
the six months ended June 30, 1997 was $2,044,160. The Adviser has agreed to
reimburse the Fund to the extent that the aggregate annual expenses of the Fund,
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 Fund's ongoing operations,
exceed 1.75% of the average daily net assets of the Fund.
Certain officers and trustees of the Funds are also officers, limited partners
or shareholders of limited partners of the Adviser. The Funds make no direct
payments to its officers or trustees who are affiliated with the Adviser.
For the six months ended June 30, 1997, the Fund paid fees of $9,396 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 Fund 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.
SEMI-ANNUAL REPORT - JUNE 30, 1997 19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
Six Months Ended Year Ended
6/30/97 12/31/96
----------------------------------
Shares sold 5,061,450 3,541,731
Shares issued
for reinvestment
of dividends -- 1,876,407
---------- -----------
5,061,450 5,418,138
Less shares redeemed (1,465,316) (3,385,587)
Less redemption in-kind -- (363,595)
---------- -----------
Net increase in shares
outstanding 3,596,134 1,668,956
---------- -----------
---------- -----------
5
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the six
months ended June 30, 1997 are as follows:
Cost of purchases $ 162,850,886
Proceeds from sales 94,511,384
REPORT FOR THE SIX MONTHS ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------
This report, including the unaudited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund. The
report is not authorized for distribution to prospective investors in the Fund
unless it is accompanied or preceded by a currently effective prospectus of the
Funds.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
20 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
FOR 24-HOUR SKYLINE FUNDS PRICES CALL: 1.800.828.2SKY
TO SPEAK WITH A SKYLINE FUNDS REPRESENTATIVE
DURING NORMAL BUSINESS HOURS CALL: 1.800.458.5222
- --------------------------------------------------------------------------------
[LOGO]
311 South Wacker Dr.
Suite 4500
Chicago, Illinois 60606
<PAGE>
[LOGO]
SKYLINE SPECIAL EQUITIES II
INVESTING IN SMALL-SIZED COMPANIES
- ----------------------- STRATEGY
- Value orientation - low price/earnings ratio-
20% plus discount to the market
- Attention to growth - forecasted EPS growth in
the 10% to 20% range
- Focus on "neglected" companies - limited
Wall Street research coverage
- Market cap range of $400 million to $2 billion
JUNE 30, 1997
<PAGE>
LETTER FROM KENNETH S. KAILIN, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
July 18, 1997
Dear Shareholder:
We are pleased to report that the Fund continued to post both strong relative
and absolute performance returns over the most recent period. Specifically, for
the three-month period ending June 30, 1997, the Fund returned 19.3%, while the
average small company stock fund was up 17.1%, as measured by Lipper Analytical
Services, Inc. The Fund's performance also compares quite favorably to the
Russell 2000 Index, which returned 16.2% during the same period. The Fund has
now beaten the Index for six consecutive quarters. The Fund's net asset value
was $13.61 per share on June 30, 1997.
For the six-month period ending June 30, 1997, the Fund returned 14.0%. This
return compares well against the Russell 2000 Index, which rose 10.2% for the
same period. The average small company stock fund increased by 9.0% during this
period.
For the 12-month period ending June 30, 1997, the Fund rose 28.2% compared to
the Russell 2000 Index, which grew 16.3%. The return for the average small
company stock fund paled in comparison at 13.7%. Clearly, the past year has been
very successful for the shareholders of the Fund.
MARKET OVERVIEW
In an environment where the economic conditions were almost perfect (solid Gross
Domestic Product growth, low unemployment, low inflation, high consumer
confidence, and falling interest rates), stock prices were strong in most
segments of the market.
Small stocks, which had been badly lagging the returns of large stocks for some
time, performed much better in the second quarter. As measured by the Russell
2000 Index, small stocks returned 16.2% in the second quarter, while large
stocks, as measured by the Standard & Poor's 500 Index, rose 17.5%.
In terms of styles, small stock growth managers, as measured by the Russell 2000
Growth Index, returned 17.6% in the quarter. This increase moderately
outperformed small stock value managers who, as measured by the Russell 2000
Value Index, returned 15.1%.
In terms of small company performance by sector, technology, producer durables,
and autos and transportation issues all returned over 20% in the second quarter.
No sector produced a negative return. The worst sectors were utilities,
materials and processing, and health care, which all still gained over 10% in
the period.
FUND REVIEW
The Fund's strong second quarter return cannot be attributed to any one or two
factors. The performance was generated from generally good stock selection and
proper industry exposure. All of the Fund's major industry sectors produced
positive results, and eight of the ten sectors generated returns which exceeded
the Russell 2000 Index return of 16.2% for the quarter.
SEMI-ANNUAL REPORT - JUNE 30, 1997 1
<PAGE>
The best sectors for the Fund included producer durables, technology, health
care, and consumer discretionary. Each of these sectors returned over 20% during
the three months ending June 30, 1997. The healthy economy allowed strong
business profits in many areas. The only modestly disappointing sectors were
energy and consumer staples, which returned less than 10%.
The Fund was generally well-balanced in the quarter relative to the Index with
the major exception being utility stocks, which are generally not owned by the
Fund.
Individual stock selection was also quite successful during the second quarter.
A number of relatively new Fund additions performed very well, along with many
stocks that recovered from stock price corrections seen in the first quarter.
Thus far in 1997, the Fund has also benefited from several stocks which received
buy-out offers at higher than market prices.
OUTLOOK
Value investors, by their nature, tend to own more economically and interest
rate sensitive stocks than most investors, and the 1997 economy has been kind to
our style thus far. While the stock market appears expensive on most valuation
measures, the economy has been extremely well-behaved. All signs at this time
point toward continued economic growth with modest inflation. This environment
seems likely to produce a stable backdrop for further corporate profit growth,
with potentially higher stock prices. This would be a good scenario for the
Fund. However, if consumer spending picks up later this year as many suspect,
fears concerning higher interest rates could create additional market volatility
along the way.
Small stock performance, while improved, has continued to lag the performance of
larger stocks for a long time. This has been frustrating, however, it has also
created many situations where smaller companies are simply selling at valuations
which are very cheap relative to large company peers. The Fund owns a collection
of these stocks where growth prospects are bright, yet the stocks trade at a big
valuation discount compared to the general stock market. For this reason, we
remain upbeat concerning the long-term relative potential of the Fund.
Sincerely,
/s/ Kenneth S. Kailin
2 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
SPECIAL
EQUITIES II RUSSELL 2000 RUSSELL 2500
P/E RATIO (MEDIAN) 17.2 22.6 22.1
PRICE/BOOK 2.50 2.62 2.65
PRICE/SALES 0.97 1.35 1.32
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 17.0% 22.0% 19.1%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $820 million $620 million $1.2 billion
PORTFOLIO VALUE $130 million $792 billion $1,600 billion
NUMBER OF HOLDINGS 48 2,000 2,500
- --------------------------------------------------------------------------------
TICKER SYMBOL: SPEQX
CUSIP #: 830833406
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
COHERENT, INC. (COHR)
Coherent, Inc. is the leading manufacturer of lasers for medical, scientific,
and commercial applications. Lasers have come of age and are now used in many
everyday applications such as supermarket scanners, CD players, and plastic
surgery. Coherent is continually developing and improving new lasers for its
ever-expanding customer base. Coherent is underfollowed by Wall Street and
trades at a large discount to the market despite tripling its earnings over the
last three years. Coherent's future prospects appear bright.
UNITED COMPANIES FINANCIAL CORPORATION (UC)
United Companies Financial Corporation provides home loans to consumers with low
to moderate incomes and past credit history blemishes. Loan growth has been
strong, as UC has expanded branches to over 200 locations, increased mortgage
brokerage relationships, and established new partnerships with many financial
institutions. Losses have been low since loans are secured by the borrowers'
homes. The stock is cheap by most measures.
SEMI-ANNUAL REPORT - JUNE 30, 1997 3
<PAGE>
PERFORMANCE (%)(1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Calendar Years
QTR2 YTD Since -------------------------------------
1997 1997 1 yr. 3 yrs. Inception(2) 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES II 19.28 13.99 28.18 21.23 15.64 26.6 21.0 -1.5 10.1
RUSSELL 2000 16.21 10.20 16.33 20.06 14.93 16.5 28.4 -1.8 13.8
RUSSELL 2500 15.11 11.25 20.10 22.30 16.21 19.0 31.7 -1.1 12.1
</TABLE>
SECTOR WEIGHTINGS (AS OF JUNE 30, 1997)
- --------------------------------------------------------------------------------
[CHART]
AUTOS & TRANSPORTATION 6.2%
CASH 5.2%
TECHNOLOGY 6.6%
CONSUMER DISCRETIONARY 22.4%
PRODUCER DURABLES 14.0%
MATERIALS & PROCESSING 4.8%
ENERGY 6.0%
HEALTH CARE 5.6%
FINANCIAL SERVICES 29.2%
4 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
SECTOR PERFORMANCE (AS OF JUNE 30, 1997)
- --------------------------------------------------------------------------------
2Q 1997 YEAR TO DATE
---------------------- ----------------------
SPECIAL RUSSELL SPECIAL RUSSELL
EQUITIES II 2000 EQUITIES II 2000
PRODUCER DURABLES 30.6% 23.2% 13.4% 17.0%
-------------------------------------------------------
HEALTH CARE 23.5 13.4 33.6 3.9
-------------------------------------------------------
TECHNOLOGY 23.2 23.5 23.0 -0.1
-------------------------------------------------------
CONSUMER DISCRETIONARY 22.8 18.7 18.1 13.4
-------------------------------------------------------
FINANCIAL SERVICES 19.1 13.3 18.0 13.6
-------------------------------------------------------
AUTOS & TRANSPORTATION 18.1 20.2 16.4 19.0
-------------------------------------------------------
UTILITIES 17.4 12.2 21.2 6.7
-------------------------------------------------------
MATERIALS & PROCESSING 16.7 11.2 -4.5 8.3
-------------------------------------------------------
ENERGY 7.0 15.0 -4.3 3.3
-------------------------------------------------------
CONSUMER STAPLES 1.1 16.5 -9.9 19.2
-------------------------------------------------------
OTHER 0.0 20.9 0.0 19.1
-------------------------------------------------------
SEMI-ANNUAL REPORT - JUNE 30, 1997 5
<PAGE>
TOP TEN HOLDINGS % OF NET ASSETS
- -------------------------------------------------------------------------------
BRYLANE INC.
Specialty catalogs 3.6%
AGCO CORP.
Agriculture equipment producer 3.6%
WORLD COLOR PRESS, INC.
Commercial printer 3.0%
HUGHES SUPPLY INC.
Construction/industrial supplies 2.9%
CMAC INVESTMENT CORP.
Mortgage insurance 2.8%
FURNITURE BRANDS INTERNATIONAL, INC.
Furniture manufacturer 2.6%
CINCINNATI MILACRON INC.
Cutting & machine tools 2.6%
KELLWOOD CO.
Apparel maker 2.6%
LIBBEY INC.
Glass tableware 2.5%
INTEGRATED HEALTH SERVICES, INC.
Sub-acute health care services 2.4%
TOP TEN HOLDINGS 28.6%
NOTES TO PERFORMANCE
(1) The performance for the one and three years ended June 30, 1997, and for
the period February 9, 1993 (inception) through June 30, 1997, 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 Russell 2500 Index is an unmanaged,
market value weighted index comprised of small- to mid-sized companies. All
figures take into account reinvested dividends. All indexes and fund
characteristics are compiled by Frank Russell Company.
Sources: Lipper Analytical Services and Frank Russell Company.
(2) Return is calculated from the Fund's inception on February 9, 1993.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small- and mid-sized companies, which tend to be more volatile and less liquid
than stocks of large companies.
Distributor: Funds Distributor Inc.
6 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
This page left blank intentionally.
SEMI-ANNUAL REPORT - JUNE 30, 1997 7
<PAGE>
PORTFOLIO HOLDINGS AS OF JUNE 30, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------- --------- ------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 6.2%
AUTO RELATED - 1.6%
Borg-Warner
Automotive, Inc. OEM auto parts maker 38,200 $ 2,065,187
OTHER TRANSPORTATION - 1.6%
Gulfstream Aerospace Corp.(a) Jet aircraft 68,900 2,032,550
RAILROAD - 1.8%
Canadian National
Railway Co. Railroad operator 54,400 2,380,000
TRUCKING - 1.2%
USFreightways Corp. Less than truckload carrier 58,300 1,508,513
------------
TOTAL AUTOS & TRANSPORTATION 7,986,250
CONSUMER DISCRETIONARY - 22.4%
APPAREL/TEXTILES - 2.6%
Kellwood Co. Apparel maker 121,000 3,357,750
COMMERCIAL SERVICES - 1.8%
Harland (John H.) Co. Check printing 105,100 2,397,593
CONSUMER PRODUCTS/SERVICES - 7.0%
Furniture Brands
International, Inc.(a) Furniture manufacturer 176,900 3,427,437
Harman International
Industries, Inc. Audio equipment 58,500 2,464,313
Libbey Inc. Glass tableware 92,300 3,230,500
------------
9,122,250
PRINTING/PUBLISHING - 3.0%
World Color Press, Inc.(a) Commercial printer 161,400 3,833,250
RESTAURANTS - 1.2%
Lone Star Steakhouse &
Saloon, Inc.(a) Casual dining 58,600 1,523,600
</TABLE>
8 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------- --------- ------------
<S> <C> <C> <C>
RETAIL - 6.8%
Brylane Inc.(a) Specialty catalogs 121,000 $ 4,666,062
Fingerhut Companies, Inc. Catalog retailer 148,300 2,585,981
Zale Corp.(a) Jewelry retailer 82,200 1,628,588
------------
8,880,631
------------
TOTAL CONSUMER DISCRETIONARY 29,115,074
ENERGY - 6.0%
EXPLORATION & PRODUCTION - 6.0%
Forcenergy Inc.(a) Oil & gas producer 86,100 2,615,287
Newfield Exploration Co.(a) Oil & gas producer 124,600 2,492,000
Santa Fe Energy
Resources, Inc.(a) Oil & gas producer 185,000 2,717,188
------------
TOTAL ENERGY 7,824,475
FINANCIAL SERVICES - 29.2%
BANKS/THRIFTS - 6.0%
Community First
Bankshares, Inc. North Dakota-based bank 66,400 2,548,100
Peoples Heritage Financial
Group(a) Maine-based thrift 68,700 2,602,013
Sovereign Bancorp, Inc. East Coast savings & loan 171,020 2,608,055
------------
7,758,168
LIFE INSURANCE - 2.1%
American Heritage Life
Investment Life insurance firm 80,800 2,666,400
OTHER FINANCIAL SERVICES - 5.3%
FIRSTPLUS Financial
Group, Inc.(a) Consumer finance firm 69,000 2,346,000
United Companies
Financial Corp. Finance company 78,200 2,209,150
Western National Corp. Retirement annuities 84,300 2,260,294
------------
6,815,444
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1997 9
<PAGE>
PORTFOLIO HOLDINGS AS OF JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------- --------- ------------
<S> <C> <C> <C>
OTHER INSURANCE - 10.9%
Capital Re Corp. Specialty reinsurer 54,500 $ 2,915,750
CMAC Investment Corp. Mortgage insurance 75,700 3,614,675
Fremont General Corp. Workers' comp. insurance 55,500 2,233,875
Horace Mann Educators Corp. Property & casualty insur. 53,600 2,626,400
PennCorp Financial
Group, Inc. Life & health insurance 72,600 2,795,100
------------
14,185,800
REAL ESTATE INVESTMENT TRUSTS - 4.9%
American General
Hospitality Corp. Hotel properties 58,200 1,440,450
Arden Realty Group, Inc. Office buildings 76,200 1,981,200
Cornerstone Properties Inc. Office properties 109,800 1,688,175
Prentiss Properties Trust Office/industrial properties 48,500 1,242,813
------------
6,352,638
------------
TOTAL FINANCIAL SERVICES 37,778,450
HEALTH CARE - 5.6%
HEALTH CARE SERVICES - 5.6%
Integrated Health
Services, Inc. Sub-acute health care svc. 81,800 3,149,300
Sierra Health Services, Inc.(a) HMO 56,800 1,775,000
Trigon Healthcare, Inc.(a) HMO 95,800 2,323,150
------------
TOTAL HEALTH CARE 7,247,450
MATERIALS & PROCESSING - 4.8%
BUILDING/CONSTRUCTION PRODUCTS - 2.9%
Hughes Supply Inc. Const./indust. supplies 92,500 3,700,000
SPECIALTY CHEMICALS - 0.1%
Cambrex Corp. Synthetic chemicals 2,900 114,912
STEEL/IRON - 1.8%
UCAR International Inc.(a) Steelmaking materials 51,200 2,342,400
------------
TOTAL MATERIALS & PROCESSING 6,157,312
PRODUCER DURABLES - 14.0%
MACHINERY - 6.1%
AGCO Corp. Agriculture equip. producer 128,600 4,621,563
Cincinnati Milacron Inc. Cutting & machine tools 129,600 3,361,500
------------
7,983,063
</TABLE>
10 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------- --------- ------------
<S> <C> <C> <C>
OTHER PRODUCER DURABLES - 7.9%
Applied Power Inc. Industrial products mfgr. 51,200 $ 2,643,200
Essex International Inc.(a) Wire & cable producer 112,400 3,133,150
General Cable Corp. Wire & cable producer 82,600 2,116,625
TriMas Corp. Diversified manufacturer 86,200 2,424,375
------------
10,317,350
------------
TOTAL PRODUCER DURABLES 18,300,413
TECHNOLOGY - 6.6%
BancTec Inc.(a) Financial software/equip. 116,300 3,016,531
Coherent, Inc.(a) Laser manufacturer 69,300 3,083,850
Wyle Electronics Electronics distributor 63,400 2,504,300
------------
TOTAL TECHNOLOGY 8,604,681
------------
TOTAL COMMON STOCKS - 94.8%
(Cost: $99,601,438) 123,014,105
MONEY MARKET INSTRUMENTS(b)
Yield 5.23% to 5.30%
due August 1997 to February 1998
American Family Financial Services 692,410
General Mills, Inc. 63,455
Johnson Controls, Inc. 3,829,154
Pitney Bowes Credit Corp. 249,134
Warner-Lambert Co. 74,867
Wisconsin Electric Power Corp. 1,183,869
------------
TOTAL MONEY MARKET INSTRUMENTS - 4.7%
(Cost: $6,092,889) 6,092,889
------------
TOTAL INVESTMENTS - 99.5%
(Cost: $105,694,327) 129,106,994
OTHER ASSETS LESS LIABILITIES - 0.5% 701,089
------------
NET ASSETS - 100.0% $129,808,083
------------
------------
</TABLE>
(a) Non-income producing security.
(b) Variable rate demand notes. Interest rates are reset every seven days.
Rates disclosed represent rates in effect on June 30, 1997.
Based on cost of investments for federal income tax purposes of $105,694,327, on
June 30, 1997, net unrealized appreciation was $23,412,667, consisting of gross
unrealized appreciation of $23,911,340 and gross unrealized depreciation of
$498,673.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1997 11
<PAGE>
STATEMENT OF ASSETS & LIABILITIES AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Cost: $105,694,327) $129,106,994
Receivable for:
Securities sold $ 1,614,174
Dividends and interest 111,655
Shares sold 332,789 2,058,618
-----------
Organization costs, net of accumulated
amortization of $15,722 6,519
------------
Total assets 131,172,131
------------
LIABILITIES & NET ASSETS
Payable for:
Securities purchased 264,347
Shares redeemed 932,245
Advisory fee 154,273
Trustees' fees 1,233
Organization costs 11,950 1,364,048
----------- ------------
Net assets applicable to shares
outstanding $129,808,083
------------
------------
Shares outstanding--no par value
(unlimited number of shares authorized) 9,540,995
------------
------------
PRICING OF SHARES
Net asset value, offering price, and
redemption price per share $13.61
------------
------------
ANALYSIS OF NET ASSETS
Paid-in capital $ 96,976,585
Undistributed net realized gain on
sales of investments 9,595,693
Unrealized appreciation of investments 23,412,667
Undistributed net investment loss (176,862)
------------
Net assets applicable to shares outstanding $129,808,083
------------
------------
See accompanying notes to financial statements.
12 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
Investment income:
Dividends $ 437,178
Interest 218,794
------------
Total investment income 655,972
Expenses:
Investment advisory fee 822,093
Fees to unaffiliated trustees 9,396
Amortization of organization costs 1,345
------------
Total expenses 832,834
------------
Net investment loss (176,862)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 5,671,131
Net change in unrealized appreciation 10,615,004
------------
Net realized and unrealized gain on investments 16,286,135
------------
Net increase in net assets resulting from operations $ 16,109,273
------------
------------
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1997 13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Six Months Ended
6/30/97 Year Ended
(unaudited) 12/31/96
------------ ------------
From operations:
Net investment loss $ (176,862) $ (235,416)
Net realized gain on sales of
investments 5,671,131 20,381,999
Net change in unrealized appreciation 10,615,004 2,418,395
------------ ------------
Net increase in net assets resulting
from operations 16,109,273 22,564,978
Distributions to shareholders from:
Net investment income - (34,255)
Net realized gains - (16,359,084)
------------ ------------
Total Distributions - (16,393,339)
From share transactions:
Proceeds from shares sold 49,481,809 20,849,640
Reinvestments of dividends
and capital gain distributions - 16,109,334
Payments for shares redeemed (41,115,582) (27,001,291)
------------ ------------
Net increase in net assets
resulting from share transactions 8,366,227 9,957,683
------------ ------------
Total increase in net assets 24,457,500 16,129,322
Net assets at beginning of period 105,332,583 89,203,261
------------ ------------
Net assets at end of period $129,808,083 $105,332,583
------------ ------------
------------ ------------
See accompanying notes to financial statements.
14 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Year Year For the Period
Ended 6/30/97 Ended Ended Ended 2/9/93(a)-
(unaudited) 12/31/96 12/31/95 12/31/94 12/31/93
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.94 $ 11.29 $ 10.14 $ 10.79 $ 10.00
-------- -------- -------- --------- --------
Income from Investment
Operations
Net investment (loss) income (0.02) (0.02) 0.06 0.02 0.01
Net realized and unrealized
gain (loss) on investments 1.69 2.94 2.06 (0.19) 1.00
-------- -------- -------- --------- --------
Total from Investment
Operations 1.67 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 $ 13.61 $ 11.94 $ 11.29 $ 10.14 $ 10.79
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
Total Return 13.99%(d) 26.60% 20.95% (1.52%) 10.08%(c)
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.52%(b) 1.53% 1.52% 1.51% 1.51%(b)
Ratio of net investment
(loss) income to
average net assets (0.32%)(b) (0.24%) 0.50% 0.22% (0.10%)(b)
Fund turnover rate 115%(b) 145% 102% 82% 111%(b)
Net assets, end of period
(in thousands) $129,808 $105,333 $ 89,203 $ 99,638 $ 58,608
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
</TABLE>
Average commission rate paid on stock transactions for the six months ended
June 30, 1997, was $0.0599 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.
(d) For the six months ended June 30, 1997.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1997 15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
Skyline Funds are an open-ended, diversified investment management company which
consists of the Special Equities Portfolio and Special Equities II. The Funds
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 ("Fund").
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at market 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 value. 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 Funds' 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.
- - FUND SHARE VALUATION - Fund 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. Central 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 Fund outstanding.
- - FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund'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 Fund are allocated to
that Fund. Other Fund expenses, such as trustees' fees, are allocated between
the two Skyline Funds.
16 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
- --------------------------------------------------------------------------------
2
TRANSACTIONS WITH AFFILIATES
The Fund'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
Fund's ordinary operating expenses, the Fund pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total advisory fee charged for
the six months ended June 30, 1997 was $822,093. The Adviser has agreed to
reimburse the Fund to the extent that the aggregate annual expenses of the Fund,
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 Fund's ongoing operations,
exceed 2.00% of the average daily net assets of the Fund.
Certain officers and trustees of the Funds are also officers, limited partners
or shareholders of limited partners of the Adviser. The Funds make no direct
payments to its officers or trustees who are affiliated with the Adviser.
For the six months ended June 30, 1997, the Fund paid fees of $9,396 to its
unaffiliated trustees.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
Six Months
Ended Year Ended
6/30/97 12/31/96
------------------------------
Shares sold 4,075,228 1,685,216
Shares issued
for reinvestment
of dividends - 1,398,376
---------- ----------
4,075,228 3,083,592
Less shares redeemed (3,353,934) (2,164,214)
---------- ----------
Net increase in
shares outstanding 721,294 919,378
---------- ----------
---------- ----------
SEMI-ANNUAL REPORT - JUNE 30, 1997 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the six
months ended June 30, 1997 are as follows:
Cost of purchases $ 67,017,160
Proceeds from sales 59,787,246
REPORT FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
This report, including the unaudited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund. The
report is not authorized for distribution to prospective investors in the Fund
unless it is accompanied or preceded by a currently effective prospectus of the
Fund.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
18 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
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SEMI-ANNUAL REPORT - JUNE 30, 1997 19
<PAGE>
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20 SEMI-ANNUAL REPORT - JUNE 30, 1997
<PAGE>
FOR 24-HOUR SKYLINE FUNDS PRICES CALL: 1.800.828.2SKY
TO SPEAK WITH A SKYLINE FUNDS REPRESENTATIVE
DURING NORMAL BUSINESS HOURS CALL: 1.800.458.5222
- --------------------------------------------------------------------------------
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311 South Wacker Dr.
Suite 4500
Chicago, Illinois 60606
