<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1998
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. 25 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 27 [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 28, 1998 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
- --------------------------------------------------------------------------------
<PAGE>
SKYLINE FUNDS
Cross-reference sheet pursuant to rule 495(a) of Regulation C
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) Management of Skyline - Performance
(d) Financial Highlights
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, Skyline
Small Cap Value Plus, and Skyline Small Cap Contrarian
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; Purchasing and Redeeming Shares
through Intermediaries; Net Asset Value
(c) Not applicable
(d) Purchasing Shares
(e)-(g) Not applicable
ii
<PAGE>
<TABLE>
<CAPTION>
Item Location or Caption
- ---- -------------------
<S> <C>
8(a) Redeeming Shares
(b) Purchasing and Redeeming Shares through Intermediaries
(c)-(d) Redeeming Shares
9 Not applicable
PART B (STATEMENT OF ADDITIONAL INFORMATION)
10(a)&(b) Front cover
11 Table of Contents
12 Skyline and the Funds
13(a)-(c) Investment Policies; Investment Restrictions
(d) Investment 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) Purchase and Redemption of Shares
(b) Purchase and Redemption of Shares; Financial Statements
(c) Purchase and Redemption of Shares
20 Taxes
21(a)&(b) General Information - Distributor
(c) Not applicable
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Item Location or Caption
- ---- -------------------
<S> <C>
22(a) Not applicable
(b) Performance Information
23 Financial Statements
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
</TABLE>
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
PRICE LINE -- (800) 828-2SKY
(800) 828-2759
April 28, 1998
SKYLINE SPECIAL EQUITIES PORTFOLIO seeks maximum capital appreciation
primarily through investment in common stocks that the Adviser considers
undervalued. Skyline Special Equities Portfolio emphasizes investments in
companies that have below average valuations and above average earnings growth
prospects. Skyline Special Equities Portfolio also invests in stocks that are
depressed due to current problems at the company where there is an expectation
that the company's operations will improve. Skyline Special Equities Portfolio
emphasizes investments in small companies whose outstanding shares have an
aggregate market value of less than $1 billion.
SKYLINE SMALL CAP VALUE PLUS seeks maximum capital appreciation primarily
through investment in common stocks that the Adviser considers undervalued.
Skyline Small Cap Value Plus emphasizes investments in companies that have
attractive valuations plus solid growth prospects. These companies will often
have earnings growth prospects that are superior to the average publicly traded
company. Skyline Small Cap Value Plus emphasizes investments in small companies
whose outstanding shares have an aggregate market value under $2 billion. Prior
to April 28, 1998, Skyline Small Cap Value Plus was named Skyline Special
Equities II.
SKYLINE SMALL CAP CONTRARIAN seeks maximum capital appreciation primarily
through investment in common stocks that the Adviser considers undervalued.
These stocks are generally found among companies that are viewed negatively in
the market due to disappointing financial results. Due to the uncertainty
regarding the eventuality and timing of profitability improvements, stocks
purchased for Skyline Small Cap Contrarian should reflect lower valuations and
therefore more potential for capital appreciation should profitability improve.
Skyline Small Cap Contrarian emphasizes investments in small companies whose
outstanding shares have an aggregate market value between $50 million and $2
billion.
SKYLINE SPECIAL EQUITIES PORTFOLIO
IS CLOSED TO NEW INVESTORS. SEE "PURCHASING SHARES."
(CONTINUED ON FOLLOWING PAGE)
------------------------
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>
Skyline Special Equities Portfolio, Skyline Small Cap Value Plus, and Skyline
Small Cap Contrarian are "no-load" funds. There are no sales or redemption
charges, and there are no "12b-1" plans. Skyline Special Equities Portfolio,
Skyline Small Cap Value Plus, and Skyline Small Cap Contrarian 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, Skyline Small Cap Value Plus, and Skyline Small Cap Contrarian, 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 Funds 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,
Skyline Small Cap Value Plus, and Skyline Small Cap Contrarian.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HIGHLIGHTS................................................................... 1
EXPENSE INFORMATION.......................................................... 4
FINANCIAL HIGHLIGHTS......................................................... 5
INVESTMENT OBJECTIVES, POLICIES AND PORTFOLIO MANAGERS....................... 9
SKYLINE SPECIAL EQUITIES PORTFOLIO....................................... 9
SKYLINE SMALL CAP VALUE PLUS............................................. 10
SKYLINE SMALL CAP CONTRARIAN............................................. 10
RISKS........................................................................ 11
INVESTMENT RESTRICTIONS...................................................... 12
PURCHASING SHARES............................................................ 13
BY CHECK................................................................. 13
BY WIRE.................................................................. 14
GENERAL SHARE PURCHASE POLICIES.......................................... 14
REDEEMING SHARES............................................................. 14
BY MAIL.................................................................. 14
BY TELEPHONE............................................................. 15
GENERAL REDEMPTION POLICIES.............................................. 16
PURCHASING AND REDEEMING SHARES THROUGH INTERMEDIARIES....................... 16
NET ASSET VALUE.............................................................. 17
SHAREHOLDER SERVICES......................................................... 18
SHAREHOLDER ACCOUNTS..................................................... 18
RETIREMENT PLANS......................................................... 18
EXCHANGE PRIVILEGE....................................................... 18
AUTOMATIC INVESTMENT PLAN................................................ 19
SYSTEMATIC WITHDRAWAL PLAN............................................... 20
DIVIDEND PURCHASE PLAN................................................... 20
DIVIDENDS AND DISTRIBUTIONS.................................................. 20
TAXES........................................................................ 21
MANAGEMENT OF SKYLINE........................................................ 22
THE TRUSTEES............................................................. 22
THE ADVISER.............................................................. 22
PORTFOLIO TRANSACTIONS................................................... 24
PERFORMANCE.............................................................. 24
SKYLINE AND ITS SHARES....................................................... 25
SHARES................................................................... 25
VOTING RIGHTS............................................................ 26
SHAREHOLDER INQUIRIES.................................................... 26
</TABLE>
<PAGE>
HIGHLIGHTS
SKYLINE SPECIAL EQUITIES PORTFOLIO, SKYLINE SMALL CAP VALUE PLUS, and
SKYLINE SMALL CAP CONTRARIAN (each, a "Fund" and collectively, the "Funds") are
series of Skyline Funds ("Skyline"). Each Fund is a "no-load" fund. There are no
sales or redemption charges.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES,
POLICIES AND
PORTFOLIO MANAGERS
SKYLINE SPECIAL SKYLINE SPECIAL EQUITIES PORTFOLIO seeks
EQUITIES PORTFOLIO maximum capital appreciation primarily
through investment in common stocks that the
Adviser considers undervalued. Special
Equities Portfolio emphasizes investments in
companies that have below average valuations
and above average earnings growth prospects.
The Fund also invests in stocks that are
depressed due to current problems at the
company where there is an expectation that
the company's operations will improve.
Special Equities Portfolio emphasizes
investments in small companies whose
outstanding shares have an aggregate market
value of less than $1 billion. The Adviser
attempts to identify companies that it
believes are neglected by the investment
community. (See "Investment Objectives,
Policies and Portfolio Managers.")
William M. Dutton is portfolio manager of
Skyline Special Equities Portfolio.
SKYLINE SMALL CAP SKYLINE SMALL CAP VALUE PLUS seeks maximum
VALUE PLUS capital appreciation primarily through
investment in common stocks that the Adviser
considers undervalued. Small Cap Value Plus
emphasizes investments in companies that
have attractive valuations plus solid growth
prospects. These companies will often have
earnings growth prospects that are superior
to the average publicly traded company.
Small Cap Value Plus emphasizes investments
in small companies whose outstanding shares
have an aggregate market value under $2
billion. The Adviser attempts to identify
companies that it believes are neglected by
the investment community. (See "Investment
Objectives,
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Policies and Portfolio Managers.")
Kenneth S. Kailin is portfolio manager of
Skyline Small Cap Value Plus.
Prior to April 28, 1998, Skyline Small Cap
Value Plus was named Skyline Special
Equities II.
SKYLINE SMALL CAP SKYLINE SMALL CAP CONTRARIAN seeks maximum
CONTRARIAN capital appreciation primarily through
investment in common stocks that the Adviser
considers undervalued. These stocks are
generally found among companies that are
viewed negatively in the market due to
disappointing financial results. SKYLINE
SMALL CAP CONTRARIAN emphasizes investments
in small companies whose outstanding shares
have an aggregate market value between $50
million and $2 billion. (See "Investment
Objectives, Policies and Portfolio
Managers.")
Daren C. Heitman is portfolio manager of
Skyline Small Cap Contrarian.
INVESTMENT RISKS Over time, stocks have historically provided
superior long-term capital appreciation
potential. However, stock prices may decline
over short or even extended periods. Stock
markets tend to move in cycles, with periods
of rising stock prices and periods of
falling stock prices. As a result, the Funds
should be considered long-term investments,
designed to provide the best results when
held for several years or more. The Funds
may not be suitable investments if you have
a short-term investment horizon or are
unwilling to accept fluctuations in share
price, including significant declines over a
given period.
Because the Funds invest in stocks of small
companies, which tend to be more volatile
and less liquid than stocks of larger
companies, investing in one of the Skyline
Funds may involve an above-average degree of
risk. (See "Risks")
MINIMUM PURCHASE $1,000 for initial investments and $100 for
subsequent investments. (See "Purchasing
Shares.")
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
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 $1.4
billion in assets as of March 31, 1998.
EXPENSES Each Fund pays the Adviser a comprehensive
fee out of which the Adviser pays all of the
Fund's ordinary costs and expenses, except
the fees and expenses of Skyline's
non-interested trustees and organization
costs. (See "Management of Skyline -- THE
ADVISER.")
DISTRIBUTOR Funds Distributor, Inc.
</TABLE>
3
<PAGE>
EXPENSE INFORMATION
The following table shows all fees paid by shareholders or assessed against
assets of the Funds:
<TABLE>
<CAPTION>
SKYLINE
SPECIAL SKYLINE SKYLINE
EQUITIES SMALL CAP SMALL CAP
PORTFOLIO VALUE PLUS CONTRARIAN
----------- ----------- -----------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of
offering price)............................... none none none
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price)........................................ none none none
Deferred Sales Load............................ none none none
Redemption Fees (1)............................ none none none
Exchange Fees.................................. none none none
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Comprehensive Management Fees (including most
operating
expenses) (2)................................. 1.47% 1.50% 1.50%
12b-1 Fees..................................... none none none
Other Expenses................................. .01% 0.01% 0.21%
----------- ----------- -----------
Total Operating Expenses....................... 1.48% 1.51% 1.71%
</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 agreement, the Adviser pays all of the ordinary
operating expenses of each Fund, except the fees and expenses of Skyline's
non-interested trustees and 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 Fund will bear, directly or
indirectly. The annual operating expenses for the Funds, as shown in the table,
represent Skyline Special Equities Portfolio's and Skyline Small Cap Value
Plus's actual operating expenses during 1997 and Skyline Small Cap Contrarian's
estimated operating expenses for 1998.
4
<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
Funds:
<TABLE>
<CAPTION>
SKYLINE
SPECIAL SKYLINE SKYLINE
EQUITIES SMALL CAP SMALL CAP
PORTFOLIO VALUE PLUS CONTRARIAN
----------- ----------- -----------
<S> <C> <C> <C>
1 year........................................... $ 15 $ 16 $ 18
3 years.......................................... 47 48 54
5 years.......................................... 81 82
10 years......................................... 177 180
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES; THE FUNDS' 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 Funds' 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 Fund 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, Skyline Small Cap Value Plus, and Skyline Small Cap Contrarian, which
may be obtained without charge from Skyline upon request. The auditors' report
and further information about the performance of the Funds is contained in the
Funds' Annual Reports and the Statement of Additional Information, which may be
obtained from Skyline free of charge.
5
<PAGE>
SKYLINE SPECIAL EQUITIES PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1997 1996 1995(a) 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of year....... $ 18.16 $ 16.79 $ 15.64 $ 17.83 $ 17.12 $ 12.67 $ 10.32 $ 11.49
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment (loss) income............. (0.07) (0.04) (0.06) (0.08) (0.09) (0.01) 0.01 0.10
Net realized and unrealized gain (loss)
on investments.......................... 6.46 5.02 2.21 (0.18) 3.94 5.37 4.74 (1.17)
--------- --------- --------- --------- --------- --------- --------- ---------
Total from Investment Operations......... 6.39 4.98 2.15 (0.26) 3.85 5.36 4.75 (1.07)
--------- --------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income..... -- -- -- -- -- -- (0.01) (0.10)
Dividends from net realized gains on
investments............................. (2.89) (3.61) (1.00) (1.93) (3.14) (0.91) (2.39) --
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS........................ (2.89) (3.61) (1.00) (1.93) (3.14) (0.91) (2.40) (0.10)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value at end of year............. $ 21.66 $ 18.16 $ 16.79 $ 15.64 $ 17.83 $ 17.12 $ 12.67 $ 10.32
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (b)........................... 35.43% 30.37% 13.83% (1.15%) 22.85% 42.45% 47.28% (9.28%)
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets.................................. 1.48% 1.51% 1.51% 1.49% 1.48% 1.51% 1.55% 1.59%
Ratio of net investment (loss) income to
average net assets...................... (0.41%) (0.32%) (0.35%) (0.49%) (0.54%) (0.19%) 0.09% 0.95%
Portfolio turnover rate.................. 62% 130% 71% 82% 104% 87% 104% 98%
Average commission rate paid (c)......... $ 0.0601 $ 0.0636
Net assets at end of year (in thousands)... $ 467,070 $ 219,480 $ 174,899 $ 202,771 $ 228,011 $ 172,385 $ 37,495 $ 22,154
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1989 1988
--------- ---------
<S> <C> <C>
Net asset value at beginning of year....... $ 10.32 $ 7.99
--------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment (loss) income............. 0.13 0.05
Net realized and unrealized gain (loss)
on investments.......................... 2.33 2.33
--------- ---------
Total from Investment Operations......... 2.46 2.38
--------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income..... (0.13) (0.05)
Dividends from net realized gains on
investments............................. (1.16) --
--------- ---------
TOTAL DISTRIBUTIONS........................ (1.29) (0.05)
--------- ---------
Net asset value at end of year............. $ 11.49 $ 10.32
--------- ---------
--------- ---------
TOTAL RETURN (b)........................... 23.98% 29.79%
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets.................................. 1.60% 1.70%
Ratio of net investment (loss) income to
average net assets...................... 1.30% 0.61%
Portfolio turnover rate.................. 90% 68%
Average commission rate paid (c).........
Net assets at end of year (in thousands)... $ 21,056 $ 11,498
--------- ---------
--------- ---------
</TABLE>
- ------------------------
See "Notes to Financial Highlights" on page 8.
6
<PAGE>
SKYLINE SMALL CAP VALUE PLUS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, FEBRUARY 9,
--------------------------------------------- 1993(d) TO
1997 1996 1995(a) 1994 DECEMBER 31, 1993
-------- -------- ------- ------- -----------------
<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.............................. (0.03) (0.02) 0.06 0.02 0.01
Net realized and unrealized gain (loss) on investments.... 3.13 2.94 2.06 (0.19) 1.00
-------- -------- ------- ------- --------
Total from Investment Operations.......................... 3.10 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.......... (2.29) (2.26) (0.91) (0.46) (0.22)
Return of capital distribution............................ -- -- -- --(e) --
-------- -------- ------- ------- --------
TOTAL DISTRIBUTIONS......................................... (2.29) (2.27) (0.97) (0.48) (0.22)
-------- -------- ------- ------- --------
Net asset value at end of period............................ $ 12.75 $ 11.94 $ 11.29 $ 10.14 $ 10.79
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
TOTAL RETURN................................................ 26.21% 26.60% 20.95% (1.52%) 10.08%(f)
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets................... 1.51% 1.53% 1.52% 1.51% 1.51%(g)
Ratio of net investment (loss) income to average net
assets................................................... (0.30%) (0.24%) 0.50% 0.22% (0.10%)(g)
Portfolio turnover rate................................... 104% 145% 102% 82% 111%(g)
Average commission rate paid (c).......................... $ 0.0601 $ 0.0619
Net assets at end of period (in thousands).................. $165,687 $105,333 $89,203 $99,638 $58,608
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</TABLE>
7
<PAGE>
SKYLINE SMALL CAP CONTRARIAN
<TABLE>
<CAPTION>
DECEMBER
15,
1997(d)
TO
DECEMBER
31, 1997
---------
<S> <C>
Net asset value at beginning of period...................... $ 10.00
---------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss....................................... 0.00
Net realized and unrealized gain (loss) on investments.... 0.00
---------
Total from Investment Operations.......................... 0.00
---------
Net asset value at end of period............................ $ 10.00
---------
---------
TOTAL RETURN................................................ 0.00%(h)
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets................... 1.71%(g)
Ratio of net investment (loss) to average net assets...... (0.29%)(g)
Portfolio turnover rate................................... 0%(g)
Average commission rate paid (c).......................... $0.0514(h)
Net assets at end of period (in thousands).................. $ 4,753
---------
---------
</TABLE>
NOTES TO FINANCIAL HIGHLIGHTS:
(a) Effective September 1, 1995, Skyline Asset Management, L.P. became the
investment adviser to Skyline Special Equities Portfolio and Skyline Small
Cap Value Plus.
(b) Total return for Skyline Special Equities Portfolio does not reflect the
effect of any sales charges which may have been previously charged.
(c) Indicates the average brokerage commissions paid per share of stock bought
and sold in a transaction in which a commission was paid.
(d) Commencement of operations.
(e) Distributions were less than $.01 per share.
(f) For the period February 9, 1993 to December 31, 1993.
(g) Ratios have been determined on an annualized basis.
(h) For the period December 15, 1997 to December 31, 1997.
8
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND PORTFOLIO MANAGERS
SKYLINE SPECIAL EQUITIES PORTFOLIO
Skyline Special Equities Portfolio seeks maximum capital appreciation
primarily through investment in common stocks that the Adviser considers to be
undervalued. Companies in which Skyline Special Equities Portfolio invests
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 $1 billion.
The Adviser attempts to identify companies that it believes are neglected by the
investment community.
The Fund is ordinarily substantially fully invested, and under normal market
conditions, at least 65% of the assets of the Fund will be invested in common
stocks. In management of cash receipts or liquidity for anticipated redemptions,
the Fund may invest without limitation in high-quality fixed-income securities
or hold assets in cash or cash equivalents.
William M. Dutton is portfolio manager of Skyline Special Equities Portfolio.
Mr. Dutton is president of Skyline Funds and has been the portfolio manager of
Skyline Special Equities Portfolio since its inception in 1987. He is managing
partner and chief investment officer of the Adviser. Mr. Dutton has managed
small cap portfolios since 1985, including Skyline Growth Fund, L.L.C., a
private investment company, and the small cap investment portfolios of a number
of prominent institutional clients. In 1992, he was named "Portfolio Manager of
the Year" by Morningstar. Mr. Dutton graduated with a Bachelor of Arts degree in
English Literature from Princeton University and received a Master's degree in
Accounting from the University of Illinois. He is also a Certified Public
Accountant. Mr. Dutton has been quoted and featured in a number of well-known
investment publications, including FORBES, FORTUNE, and THE WALL STREET JOURNAL
as well as a featured guest on LOUIS RUKEYSER'S WALL STREET WEEK. He was born
and raised in the Chicagoland area where he still resides with his wife.
9
<PAGE>
SKYLINE SMALL CAP VALUE PLUS
Skyline Small Cap Value Plus seeks maximum capital appreciation primarily
through investment in common stocks that the Adviser considers undervalued.
Skyline Small Cap Value Plus emphasizes investments in companies that have
attractive valuations plus solid growth prospects. These companies often have
earnings growth prospects that are superior to the average publicly traded
company. In purchasing these stocks, strict attention is also paid to valuation.
The Adviser generally favors stocks that trade at relatively low multiples of
earnings, sales and/or cash flow.
Skyline Small Cap Value Plus emphasizes investments in small companies whose
outstanding shares have an aggregate market value under $2 billion. The Adviser
attempts to identify companies that it believes are neglected by the investment
community.
The Fund is ordinarily substantially fully invested, and under normal market
conditions, at least 65% of the assets of the Fund will be invested in common
stocks of small capitalization issuers. In management of cash receipts or
liquidity for anticipated redemptions, the Fund may invest without limitation in
high-quality fixed-income securities or hold assets in cash or cash equivalents.
Kenneth S. Kailin is portfolio manager of Skyline Small Cap Value Plus. Mr.
Kailin is executive vice president of Skyline Funds and has been the portfolio
manager of Skyline Small Cap Value Plus since its inception in 1993. He is a
partner of the Adviser. Mr. Kailin also manages portfolios that invest in small
capitalization stocks for institutional clients. Mr. Kailin joined Skyline's
predecessor organization over a decade ago as a security analyst working for Mr.
Dutton. In 1990, he became a portfolio manager. Prior to his work in the
investment field, Mr. Kailin was employed in the banking industry. Mr. Kailin
received his Bachelor of Science degree in Finance from Indiana University and
his M.B.A. from the University of Chicago. He is also a Chartered Financial
Analyst. Mr. Kailin has been featured on CNBC's MONEY TALK, PBS's DOLLAR SIGNS,
PBS's NIGHTLY BUSINESS REPORT, and on a number of radio programs and internet
sites, including Prodigy and Sage On-Line. He was born and raised in the
Chicagoland area where he still resides with his wife and three children.
Prior to April 28, 1998, Skyline Small Cap Value Plus was named Skyline
Special Equities II.
SKYLINE SMALL CAP CONTRARIAN
Skyline Small Cap Contrarian seeks maximum capital appreciation primarily
through investment in common stocks that the Adviser considers undervalued.
These stocks are generally found among companies that are viewed negatively in
the market due to disappointing financial results. Due to the uncertainty
regarding the eventuality and timing of profitability
10
<PAGE>
improvements, stocks purchased for Skyline Small Cap Contrarian should reflect
lower valuations and therefore more potential for capital appreciation should
profitability improve. Small Cap Contrarian attempts to manage investment risk
by emphasizing investments in companies with strong market positions,
competitive advantages, and competent management teams with sound business
strategies under ordinary circumstances.
Skyline Small Cap Contrarian emphasizes investments in small companies whose
outstanding shares have an aggregate market value between $50 million and $2
billion.
Skyline Small Cap Contrarian is ordinarily substantially fully invested, and
under normal market conditions, at least 65% of the Fund's assets will be
invested in common stocks of small capitalization issuers. In management of cash
receipts or for liquidity needs, the Fund may invest without limitation in
high-quality fixed-income securities or hold assets in cash or cash equivalents.
Daren C. Heitman is portfolio manager of Small Cap Contrarian. Mr. Heitman is
a senior vice president of Skyline Funds. With over seven years of experience
researching small capitalization companies, Mr. Heitman most recently worked as
a small cap securities analyst with Mr. Dutton, portfolio manager of Skyline
Special Equities Portfolio. Mr. Heitman joined Skyline's predecessor adviser in
1993 as an analyst in its institutional equity research division. Prior to that,
Mr. Heitman worked for The Ohio Company as a research analyst for two years. Mr.
Heitman has a B.B.A. in Finance from Iowa State University with a minor in
economics. Mr. Heitman is also a Chartered Financial Analyst. He was raised in
Iowa and resides in the Chicagoland area with his wife and twin daughters.
RISKS
Over time, stocks have historically provided superior long-term capital
appreciation potential. However, stock prices may decline over short or even
extended periods. Stock markets tend to move in cycles, with periods of rising
stock prices and periods of falling stock prices. As a result, the Funds should
be considered long-term investments, designed to provide the best results when
held for several years or more. The Funds may not be suitable investments if you
have a short-term investment horizon or are unwilling to accept fluctuations in
share price, including significant declines over a given period.
Because the Funds invest in stocks of small companies, which tend to be more
volatile and less liquid than stocks of larger companies, investing in one of
the Skyline Funds may involve an above-average degree of risk. Small companies,
as compared to larger companies, may have a shorter
11
<PAGE>
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 Funds attempt to reduce risk through portfolio diversification and
the use of a stock selection strategy that emphasizes undervalued common stocks,
many of which already reflect low valuations.
There can be no assurance that a Fund's investment objective will be achieved.
Each Fund'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 Fund's fundamental investment restrictions. Any change
in a Fund's investment objective might result in that Fund having an investment
objective that differs from the investment objective a shareholder considered
appropriate when investing.
Like other mutual funds, financial and business organizations and individuals
around the world, each of the Funds could be adversely affected if the computer
systems used by the Adviser, and other service providers do not properly process
and calculate date-related information from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." Skyline is taking steps that it
believes are reasonably designed to address the Year 2000 Problem with respect
to the computer systems that it uses and to obtain satisfactory assurances that
comparable steps are being taken by each of the Funds' other major service
providers. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the funds.
INVESTMENT RESTRICTIONS
Skyline has adopted for each Fund certain fundamental investment restrictions,
which may be changed only with the approval of a majority of the outstanding
shares of that Fund as defined in the Investment Company Act of 1940. Neither
Skyline Special Equities Portfolio nor Skyline Small Cap Value Plus may: (1)
invest more than 5% of its assets (valued at the time of investment) in the
securities of any single issuer, excluding government obligations; or (2) invest
in a security if, as a result of such investment, the Fund would hold more than
10% (measured at the time of investment) of the outstanding voting securities of
the issuer of such security. Skyline Small Cap Contrarian is subject to the same
restrictions, but only as to 75% of its assets. No Fund may borrow money except
for temporary or emergency purposes, and not in excess of 10% of its total
assets; or invest more than 25% of its total assets in securities of issuers in
a single industry.
12
<PAGE>
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 Fund 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 Fund 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 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 Fund, or investing part or all of the proceeds of a distribution from a plan
through which the person held shares of the Fund which does not permit transfers
or rollovers. IF YOU HAVE QUESTIONS ABOUT YOUR ELIGIBILITY TO PURCHASE SHARES OF
THE FUND, CALL SKYLINE AT (312) 913-0900 OR (800) 458-5222. Purchases of shares
of Skyline Small Cap Value Plus and Skyline Small Cap Contrarian are not
affected by this restriction.
BY CHECK. You may purchase shares of a Fund 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, an authorized agent or certain other
intermediaries. See "Purchasing and Redeeming Shares Through Intermediaries."
The transfer agent is unable to accept third party checks both on initial and
subsequent share purchases.
The purchase price of a Fund's shares is the net asset value per share next
computed after receipt by Skyline's transfer agent or authorized agent (from the
Distributor or an authorized broker-dealer or directly from a shareholder) of
your order completed in accordance with the instructions on the account
application. Your order must be received by Skyline's transfer agent or
authorized agent 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.
13
<PAGE>
Should an order to purchase a Fund's shares be canceled because your check
does not clear, you will be responsible for any resulting loss incurred by that
Fund. 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 Skyline Funds c/o
Firstar Trust Company, 615 East Michigan Street, Third Floor, Milwaukee,
Wisconsin 53202.
BY WIRE. TO PURCHASE SHARES OF A FUND BY FEDERAL WIRE, 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 Funds c/o
Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin 53201. No account
services will be established until the completed application has been received
by Skyline.
GENERAL SHARE PURCHASE POLICIES. The minimum initial investment to open an
account is $1,000, and subsequent investments must be at least $100. 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 you fail to furnish Skyline
with your 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 the Fund's shares by investors
utilizing market-timing strategies adversely affect the Funds. 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 your
written request. Fractional shares, if any, will be carried on Skyline's books
without issuance of certificates.
REDEEMING SHARES
BY MAIL. You may redeem shares of a Fund at the net asset value next
determined after your request is received by Skyline's transfer agent or an
authorized agent. Your redemption request in proper form must be received by
Skyline's transfer agent or an authorized agent 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
14
<PAGE>
received by Skyline's transfer agent or an authorized agent or telephone
authorization in proper form must be received or be on file with Skyline's
transfer agent. 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 Skyline Funds c/o
Firstar Trust Company, 615 East Michigan Street, Third Floor, Milwaukee,
Wisconsin 53202.
Each record owner of an account is required to provide a signature guarantee
on a written redemption request if (i) the redemption proceeds are being sent to
an address other than the address of record, (ii) the redemption proceeds are to
be sent to a bank or brokerage account not previously authorized by you in
accordance with the instructions on the account application, (iii) the proceeds
of the requested redemption would be more than $10,000, (iv) THE ADDRESS OF
RECORD HAS CHANGED WITHIN THE LAST 60 DAYS, (v) when you request to redeem
shares that have been issued in certificate form, (vi) when you want to have
redemption proceeds sent to a different name and/or an address other than the
address of record. 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. A signature guarantee is designed to protect you
and the Funds against fraudulent transactions by unauthorized persons.
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 you move. 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 your address of record or to a bank or brokerage account designated by
you, in writing, on the purchase application or in a letter with the
signature(s) guaranteed.
15
<PAGE>
Skyline reserves the right to require each record owner of an account to provide
a signature guarantee when you are adding telephone redemption to an account.
Skyline also reserves the right to record all telephone redemption requests. You
may not redeem by telephone shares held in an IRA account. During periods of
volatile economic and market conditions, you may have difficulty making a
redemption request by telephone, in which case a redemption request would have
to be made in writing.
GENERAL REDEMPTION POLICIES. The redemption price per share is the net asset
value next determined after receipt of the redemption request by Skyline's
transfer agent or an authorized agent, which may be more or less than your cost
depending upon the value of the Fund's investment securities at the time of
redemption. (See "Net Asset Value.") There is no charge for a redemption, but an
authorized agent may charge a fee for this service.
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 your
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 you. 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 you 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, which may take up to 15 days from the date of
purchase.
Skyline reserves the right to redeem shares in any account with a balance of
less than $750 in share value in any Fund. 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.
PURCHASING AND REDEEMING SHARES THROUGH INTERMEDIARIES
Shares of each of the Funds may be purchased or redeemed through certain
intermediaries, some of which may charge a transaction fee. From time to time,
Skyline may authorize certain financial services companies,
16
<PAGE>
broker-dealers or their designees ("authorized agents") to accept share purchase
and redemption orders for Fund shares. For purchase orders placed through an
authorized agent, a shareholder will pay the Fund's net asset value per share
next computed after the receipt by the authorized agent of such purchase order,
plus any applicable transaction fee imposed by the agent. For redemption orders
placed through an authorized agent, a shareholder will receive redemption
proceeds which reflect the net asset value per share next computed after the
receipt by the authorized agent of the redemption order, less any redemption
fees imposed by the agent. Skyline imposes no fees or charges other than those
described in this prospectus.
In some instances, an authorized agent or other financial services company may
not charge any transaction fees directly to investors in the Fund. However, for
accounting and shareholder services provided by such company with respect to
Fund shares held by that company for its customers, the company may charge a fee
(currently up to 0.35%) of the annual average value of those accounts. Those
fees, if applicable, are paid by the Adviser from its own resources.
Purchase orders and redemption requests may also be placed with intermediaries
who are not authorized agents, including certain broker-dealers. If the
intermediary through which an investor purchases or redeems shares is not an
authorized agent, the purchase or redemption price will be the net asset value
next computed after receipt of the purchase order or redemption request by
Skyline's transfer agent from the intermediary.
Any questions about purchasing or redeeming shares through an intermediary
should be directed to Skyline at (312) 913-0900 or (800) 458-5222, or the
intermediary.
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 or request, respectively,
by Skyline's transfer agent or an authorized agent.
The net asset value of each Fund's shares 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 Fund is determined by dividing the value of all of its securities and other
assets, less its liabilities, by the number of shares of the Fund 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
17
<PAGE>
traded over-the-counter are valued at the last reported bid price. Other assets
and securities are valued by methods that Skyline's board of trustees believes
will determine a fair value.
SHAREHOLDER SERVICES
SHAREHOLDER ACCOUNTS. Each shareholder of a Fund receives a quarterly account
statement showing transactions in the Fund's shares with a balance denominated
in the Fund's shares. In addition, confirmations are sent to shareholders upon
purchase, redemption, dividend reinvestment, and change of shareholder address.
For a fee, you may obtain a historical transcript of your account by requesting
one in writing from Firstar Trust Company. If you transfer ownership of your
account, each record owner of the account is required to provide a signature
guarantee. A signature guarantee is designed to protect you and the Funds
against fraudulent transactions by unauthorized persons. For additional
information, please call Skyline at (312) 913-0900 or (800) 458-5222.
RETIREMENT PLANS. Investors may use Skyline as an investment for their
Individual Retirement Accounts ("IRAs"), including regular IRAs, SEP-IRAs,
SIMPLE-IRAs and Roth 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. Master
IRA plans, 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 the Funds and
two portfolio series of Firstar Funds, Inc. -- Money Market Fund and U.S.
Government Money Market Fund (the "Firstar Money Market Funds"). Because Skyline
Special Equities Portfolio is closed to new investors, you may use the exchange
privilege to exchange into that Fund only if you currently are eligible to
invest in that Fund. All exchanges are based on the respective net asset value
per share next calculated after the receipt of an exchange request. Shares of
either Firstar Money Market Fund or any of the Funds 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 Firstar Money Market Fund must be received
by the purchase or redemption cutoff time described from time to time in the
Firstar Money Market Funds' prospectus, a copy of which can be obtained from
Skyline at (312) 913-0900 or (800) 458-5222.
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 you notify Skyline on the account
application that such authorization has been withheld. Unless authorization is
withheld, Skyline will honor exchange requests by
18
<PAGE>
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, you may have
difficulty making an exchange 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 Funds. THEREFORE, SKYLINE
RESERVES THE RIGHT TO TEMPORARILY OR PERMANENTLY TERMINATE, WITH OR WITHOUT
ADVANCE NOTICE, THE EXCHANGE PRIVILEGE OF ANY INVESTOR WHO MAKES EXCESSIVE USE
OF THE EXCHANGE PRIVILEGE (E.G., MORE THAN FOUR EXCHANGES PER CALENDAR YEAR).
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 Funds, 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 Funds. 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. HOWEVER, REDEMPTION REQUESTS MAY CONTINUE TO BE MADE AS DESCRIBED
UNDER "REDEEMING SHARES."
EXCHANGES OF SHARES ARE TAXABLE EVENTS AND MAY RESULT IN A GAIN OR LOSS FOR
FEDERAL INCOME TAX PURPOSES. A prospectus for the Firstar Money Market Funds may
be obtained by calling Skyline at (312) 913-0900 or (800) 458-5222. An investor
considering an exchange should refer to the relevant prospectus for additional
information.
AUTOMATIC INVESTMENT PLAN. Skyline has a pre-authorized purchase plan for
shareholders who wish to make automatic periodic investments in shares of a
Fund. (See "Purchasing Shares.") With regard to investments in Skyline Special
Equities Portfolio, you may use the plan only if you are eligible to invest in
that Fund. You may establish an automatic investment plan for Skyline Small Cap
Value Plus, Skyline Small Cap Contrarian or
19
<PAGE>
Skyline Special Equities Portfolio (if you are eligible to invest in that Fund)
by opening an account with $1,000 or more and delivering to Skyline's transfer
agent 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 Fund. 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. To change your bank account information, your
written request must be accompanied by a voided check or a withdrawal slip for
your new bank account. 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 Fund 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 Fund automatically invested in shares of one of the Firstar Money
Market Funds in which an account has been opened through Skyline's exchange
privilege. Similarly, dividends paid on shares in a Firstar Money Market Fund
account opened by a Skyline shareholder through the exchange privilege may be
automatically invested in shares of Skyline Small Cap Value Plus or Skyline
Small Cap Contrarian or, if the shareholder is eligible to invest in Skyline
Special Equities Portfolio, in shares of that Fund. 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 Firstar Money Market Funds, a shareholder should obtain
and read carefully the Firstar 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
20
<PAGE>
the shareholder has requested on the account application or in writing that
distributions be made in cash. The Funds 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 Fund is a separate entity for federal income tax purposes. Skyline
intends for each Fund to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. To qualify, each Fund must meet
certain income, distribution and diversification requirements. In any year in
which a Fund 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 Funds 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 Fund from its net investment income generally will be eligible for the
dividends-received deduction for corporations, depending upon the percentage of
the distributing Fund's net income derived from qualifying dividends.
Distributions by a Fund 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 that Fund. To the extent a Fund
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 Fund for shares in another Fund 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.
Any dividends or distributions have the effect of reducing the per share net
asset value by the amount of the dividends or distributions. Although a
21
<PAGE>
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 Fund'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 Funds.
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
Skyline's shareholders. The trustees appoint their own successors, provided that
at least two-thirds of the trustees, after such appointment, have been elected
by Skyline's shareholders. Skyline's 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. ("AMG"). Limited
partnership interests in the Adviser are held by corporations wholly owned by
certain officers of the Adviser, including the portfolio managers of Skyline
Special Equities Portfolio and Skyline Small Cap Value Plus.
22
<PAGE>
The officers of the Adviser manage the day-to-day operations of the Adviser.
The Funds' portfolio managers make all investment decisions for the Funds. AMG
does not manage the day-to-day operations of the Adviser, nor does it
participate in the investment process. AMG is a publicly-traded company which
acquires interests in investment management firms. The largest shareholder of
AMG is a group of private equity funds managed by TA Associates, Inc., however,
such entities have no power or authority to participate in the management or
operations of the Adviser, and it is expected that the equity ownership of such
funds will be diluted or reduced.
The Adviser manages the investment and reinvestment of each Fund's assets. 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 Funds 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 Fund 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 Fund pays the Adviser
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 average daily net assets in excess of $600
million. The Adviser has agreed to limit each Fund's expenses (including the
Adviser's fee, trustees' fees and expenses, and reimbursement of organizational
expenses, 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, 2.00% of the average daily net assets of
Skyline Small Cap Value Plus, and 1.75% of the average daily net assets of
Skyline Small Cap Contrarian. Expenses incurred in excess of these limits, if
any, will be reimbursed to the Fund by the Adviser.
Each Fund 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, Kenneth S. Kailin, portfolio manager for
Skyline Small Cap Value Plus, and Daren C. Heitman, portfolio manager for
Skyline Small Cap Contrarian, are each responsible for the day-to-day management
of their respective Fund. Mr. Dutton is chief investment officer and managing
partner of the Adviser and president of Skyline Funds. Before August 31, 1995,
Mr. Dutton was an executive vice president of Skyline's former investment
adviser. Mr. Kailin is
23
<PAGE>
partner-portfolio manager of the Adviser and an executive vice president of
Skyline Funds. Mr. Kailin was a senior vice president of Skyline's former
investment adviser from 1994 to August 31, 1995, and vice president from 1992 to
1994. Mr. Heitman has been a securities analyst with the Adviser since September
1995. Between May 1994 and September 1995, Mr. Heitman was a securities analyst
with Skyline's former investment adviser, and from January 1993 to May 1994, he
was a securities analyst with Mesirow Financial, Inc., a financial services
company.
PORTFOLIO TRANSACTIONS. Decisions as to the purchase and sale of securities
for a Fund 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 Funds' shares, but only if the Adviser reasonably
believes that the execution and commission are comparable to those available
from other qualified firms.
The Funds' historical portfolio turnover rates 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 Fund 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 Fund'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 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
24
<PAGE>
all distributions. All of the calculations described above will assume the
reinvestment of dividends and distributions in additional shares of the Fund.
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., Morningstar, Inc., or
another service to compare the performance of a Fund 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
Fund to, the historical returns on various types of financial assets.
Performance of a Fund 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.
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, Skyline
Small Cap Value Plus began operations on February 9, 1993, and Skyline Small Cap
Contrarian began operations on December 15, 1997. 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 three 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 of
shareholders, Skyline's trustees, and Skyline's officers for acts or obligations
of Skyline or the Funds 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 Fund of all losses and expenses of any
shareholder held personally liable for the obligations
25
<PAGE>
of that Fund. 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 Skyline share has one vote and fractional shares have
fractional votes. A separate vote of the shareholders of each Fund is required
for approval of Skyline's investment advisory agreement, any change in a Fund's
fundamental investment policies and restrictions, and any matters which affect
only one Fund. Shareholders of a Fund are not entitled to vote on any matter not
affecting that Fund. 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.
26
<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, IL 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, AND SKYLINE SPECIAL EQUITIES PORTFOLIO 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 SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
- ----------------------------
PROSPECTUS
- ---------------------------------
APRIL 28, 1998
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
<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 28, 1998
Skyline Special Equities Portfolio, Skyline Small Cap Value Plus, and
Skyline Small Cap Contrarian are each a series of Skyline Funds ("Skyline").
Prior to April 28, 1998, Skyline Small Cap Value Plus was named Skyline Special
Equities II. 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, Skyline Small Cap Value Plus, and
Skyline Small Cap Contrarian dated April 28, 1998, and any supplement to that
Prospectus. That Prospectus can be obtained without charge by calling or
writing to Skyline.
TABLE OF CONTENTS
Page
----
Skyline and the Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . .3
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . .6
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Management of Skyline. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Advisory Services . . . . . . . . . . . . . . . . . . . . . . . 13
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . 15
Purchase and Redemption of Shares. . . . . . . . . . . . . . . . . . . . . 18
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1
<PAGE>
SKYLINE AND THE FUNDS
Skyline's name was changed from "Skyline Fund" to "Skyline Funds" as of
April 1997. As used in this Statement of Additional Information, "Special
Equities Portfolio" means Skyline Special Equities Portfolio, "Small Cap Value
Plus" means Skyline Small Cap Value Plus, and "Small Cap Contrarian" means
Skyline Small Cap Contrarian. Prior to April 28, 1998, Skyline Small Cap Value
Plus was named Skyline Special Equities II. Special Equities Portfolio, Small
Cap Value Plus, and Small Cap Contrarian are sometimes referred to collectively
as the "Funds" and individually as a "Fund." Skyline Asset Management, L.P.
(the "Adviser") provides investment advisory and administrative services to each
of the Funds.
INVESTMENT POLICIES
TEMPORARY INVESTMENTS. To manage cash inflows or in anticipation of
redemptions, each Fund may invest, without limitation, in high-quality
fixed-income securities and may hold assets in cash or cash equivalents.
REPURCHASE AGREEMENTS. Each Fund may invest up to 5% of its net assets in
repurchase agreements. Repurchase agreements involve the acquisition by a Fund
of an underlying debt instrument, subject to an obligation of the seller to
repurchase and the Fund to resell the instrument, at a fixed price, including
yield, within a specified term. A Fund 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
Funds did not invest in repurchase agreements in the most recent fiscal year and
have no present intention of investing in repurchase agreements in the coming
year.
FOREIGN SECURITIES. The Funds 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. 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. No Fund expects to invest more than 5% of its net assets in foreign
securities.
PORTFOLIO TURNOVER. The portfolio turnover rate of Special Equities
Portfolio decreased from 130% in 1996 to 62% in 1997, and the portfolio turnover
rate of Small Cap Value Plus decreased from 145% in 1996 to 104% in 1997. The
decrease in the portfolio turnover rate during 1997, for both Special Equities
Portfolio and Small Cap Value Plus was due to an increase in the number of
portfolio holdings that met earnings expectations and an increase in selling
price targets given the overall increase in market valuations. The portfolio
turnover rate for Small Cap Contrarian during the period of its operation in
1997 was 0%.
Although the Funds do not purchase securities with an expectation of rapid
turnover, no limitations exist on the length of time that portfolio securities
must be held. At times, each Fund
2
<PAGE>
may invest for short-term capital appreciation. Portfolio turnover can occur
for a number of reasons such as general conditions in the securities markets,
more favorable investment opportunities in other securities, or other factors
relating to the desirability of holding or changing a portfolio investment.
Because of each Fund's flexibility of investment and emphasis on growth of
capital, it may have greater portfolio turnover than that of mutual funds that
have primary objectives of income or maintenance of a balanced investment
position. The turnover rate may vary greatly from year to year, but is expected
to be less than 100%. A high rate of portfolio turnover, if it should occur,
would result in increased transaction expenses. High portfolio turnover also
may result in the realization of capital gains or losses and, to the extent net
short-term capital gains are realized, any distributions resulting from such
gains will be considered ordinary income for Federal income tax purposes. (See
"Taxes" in the Funds' prospectus, and "Taxes" in this statement of additional
information.)
INVESTMENT RESTRICTIONS
For each Fund, Skyline has adopted certain fundamental investment
restrictions (which may not be changed without the approval of a majority of the
Portfolio's outstanding shares). The Funds' fundamental investment restrictions
are as follows:
SPECIAL EQUITIES PORTFOLIO AND SMALL CAP VALUE PLUS. Neither Fund may:
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 Fund's assets at the time of borrowing (including the amount
borrowed) (such Fund 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).
3
<PAGE>
6. Sell securities short or purchase securities on margin (but each
Fund 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.
SMALL CAP CONTRARIAN. The Fund may not:
1. Borrow money except (i) from banks for temporary or emergency
purposes in amounts not exceeding 10% of the value of the Fund's assets at
the time of borrowing (including the amount borrowed)(1) 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 25% of the value of its assets in real estate
investment trusts).
3. As to 75% of its total assets, invest more than 5% of its total
assets (valued at the time of investment) in securities of any one issuer,
except United States government obligations or bank certificates of deposit
and bankers' acceptances.
4. As to 75% of its total assets, 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 the issuer.
5. Issue any senior security except to the extent permitted under
the Investment Company Act of 1940.
- -------------------------
(1) The Fund will not purchase securities when its borrowing exceed 5% of the
value of its assets.
4
<PAGE>
6. Sell securities short or purchase securities on margin (but the
Fund 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 25% or more of its total assets (valued at the time of
investment) in the securities of companies in a single industry, except
United States 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 also has adopted the following additional restrictions and policies
with respect to each Fund (which may be changed by the board of trustees without
shareholder approval). Under these additional policies and restrictions, a Fund
may not:
A. Invest in companies for the purpose of exercising control or
management.
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 Fund may neither purchase more
than 3% of the voting securities of any one investment company nor invest
more than 10% of the Fund's assets (valued at the time of investment) in
all investment company securities purchased by the Fund.
C. Invest in securities of other open-end investment companies.
D. Invest more than 15% of its net 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.
E. (for Special Equities Portfolio) Invest less than 65% of its
total assets in common stocks.
5
<PAGE>
(for Small Cap Value Plus and Small Cap Contrarian) Invest less
than 65% of its total assets in common stocks of small-capitalization
issuers.
F. Invest in financial futures, options, or options on financial
futures.
G. Invest in commodities or commodity contracts.
PERFORMANCE INFORMATION
From time to time Skyline may quote total return performance data for the
Funds. Total return for a period is the percentage change in value during the
period of an investment in a Fund'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:
n
ERV = P(l+T)
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)
6
<PAGE>
For example, total return and average annual total return at December 31,
1997 of an investment of $1,000 in Special Equities Portfolio, Small Cap Value
Plus, and Small Cap Contrarian were:
<TABLE>
AVERAGE ANNUAL
TOTAL TOTAL
RETURN (%) RETURN (%)
Special Equities Portfolio ---------- ----------
- --------------------------
<S> <C> <C>
1 Year. . . . . . . . . . . . 35.43 35.43
5 Years . . . . . . . . . . . 144.05 19.54
10 Years. . . . . . . . . . . 647.63 22.28
Life of Portfolio . . . . . . 521.61 18.63
(April 23, 1987)
Small Cap Value Plus
- --------------------
1 Year. . . . . . . . . . . . 26.21 26.21
Life of Portfolio . . . . . . 109.50 16.32
(February 9, 1993)
Small Cap Contrarian
- --------------------
Life of Portfolio . . . . . . 0.0
(December 15, 1997)
</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 Fund'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 Fund would be lower.
The Funds' performance figures are not a guarantee of future results. The
performance of a Fund is a result of conditions in the securities markets,
portfolio management, and operating expenses. Although total return information
is useful in reviewing a Fund'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 Fund 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 Funds. The comparison of a Fund to an alternative
investment should consider differences in features and expected performance.
7
<PAGE>
A Fund 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 the Funds include, but are not limited to, the
following:
Barron's Kiplinger's Personal Finance
Bloomberg Personal Finance 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 Planning Time
Financial World USA Today
FA Advisor U.S. News and World Report
Forbes The Wall Street Journal
Fortune Worth
Institutional Investor
Investor's Daily
When a newspaper, magazine, or other publication mentions Skyline or a
Fund, such mention may include: (i) listings of some or all of a Fund's
holdings; (ii) descriptions of characteristics of some or all of the securities
held by a Fund, including price-to-earnings, price-to-sales, and price-to-book
value 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 Fund, in the view of
Skyline, a portfolio manager or the Adviser.
Each Fund may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
8
<PAGE>
The performance of the Funds 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 Index NASDAQ Over-the-Counter Composite Index
Russell 2500 Index NASDAQ Over-the-Counter Industrials Index
Russell 3000 Index (These indexes generally reflect the
Russell MidCap Index performance of stocks traded in the
Russell 2,000 Value Index indicated markets.)
Standard & Poor's Small Cap 600
Index
Standard & Poor's 500 Stock Index
Standard & Poor's MidCap 400 Index
Wilshire 5000
Wilshire 4500
Wilshire Quantum Small Value Index
Wilshire Next 1750 Index
Wilshire Quantum Small Cap Index
(These indexes are widely recognized
indicators of general U.S. stock
market results.)
The Funds' 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 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 mutual 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 Portfolio 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 the Portfolio to a different category or develop (and
place the Portfolio into) a new category, the Portfolio may compare its
performance or ranking against other funds in the newly assigned category, as
published by the service.
9
<PAGE>
Moreover, the 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 Fund's risk score (which is a function of the Fund's monthly
returns less the 3-month Treasury bill return) from the Fund'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 Funds 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 Funds may use Ibbotson's historical data regarding the Consumer Price Index.
The Funds 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 Fund as of
March 31, 1998 were Charles Schwab & Co., Inc., as a nominee for various
beneficial owners, which held 26.03% and the Boston Safe Deposit & Trust Co.,
Trustee f/b/o Eastman Kodak Employees' Savings and Investment Plan, as record
owner for various beneficial owners, which held 8.87% of the shares of Special
Equities Portfolio, Charles Schwab & Co., Inc., as a nominee for various
beneficial owners, which held 20.59% and Hartford Life Insurance Company
Deferred Pension III Separate Account, which held 5.97% of the shares of Small
Cap Value Plus, and Charles Schwab & Co., Inc., as a nominee for various
beneficial owners, which held 23.98%, Mesirow Financial, Inc., as a nominee for
a beneficial owner, which held 5.50%, and Douglas H. Brown II, who held 6.59% of
the shares of Small Cap Contrarian. The address of Charles Schwab & Co., Inc.
is 101 Montgomery Street, San Francisco, California 94104. The address of
Boston Safe Deposit & Trust Co. is 1 Cabot Road, Medford, Massachusetts 02155.
The address of the Hartford Life Insurance Company Deferred Pension III Separate
Account is P.O. Box 2999, Hartford, Connecticut 06104. The address of Mesirow
Financial, Inc., is 350 North Clark Street, Chicago, Illinois 60610. Douglas H.
Brown II's address is P.O. Box 18130, Reno, Nevada 89511.
10
<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,(*) 44, PRESIDENT AND TRUSTEE. Chief Investment Officer
and Managing Partner, Skyline Asset Management, L.P. and registered
representative, Funds Distributor, Inc., since September 1995. Previously,
Executive Vice President and Portfolio Manager (Special Equities Portfolio),
Mesirow Asset Management, Inc.
WILLIAM L. ACHENBACH, 55, TRUSTEE. President, W.L. Achenbach & Associates,
Inc., a financial counseling firm, since July 1992. Previously, Executive Vice
President, Brownson, Rehmus & Foxworth, Inc., a financial counseling firm.
PAUL J. FINNEGAN, 45, TRUSTEE. Vice President, Madison Dearborn Partners,
Inc., a venture capital firm, since January 1993. Previously, Vice President,
First Chicago Venture Capital, a venture capital firm.
DAVID A. MARTIN, 46, TRUSTEE. Attorney and Principal, Righeimer, Martin &
Cinquino, P.C.
RICHARD K. PEARSON, 58, TRUSTEE. Retired. Director, Citizens Savings Bank
(Anamosa, Iowa), since February 1998, and Director, First Community Bank
(Milton, Wisconsin), since January 1998. Previously, Director and President,
LaSalle Bank, Westmont (Westmont, Illinois), from 1994 to 1997, and Director,
Chief Executive Officer, and President, LaSalle Bank, Northbrook (Northbrook,
Illinois), from 1986 to 1994.
STEPHEN F. KENDALL, 43, EXECUTIVE VICE PRESIDENT. Partner-Chief Operating
Officer, Skyline Asset Management, L.P., since January 1998. Previously,
Regional Vice President, Metro Region, Nabisco Biscuit Company.
KENNETH S. KAILIN, 39, EXECUTIVE VICE PRESIDENT. Partner-Portfolio
Manager, Skyline Asset Management, L.P., since September 1995. Previously,
Senior Vice President and Portfolio Manager (Small Cap Value Plus), Mesirow
Asset Management, Inc.
GEOFFREY P. LUTZ, 47, EXECUTIVE VICE PRESIDENT. Partner-Institutional
Marketing, Skyline Asset Management, L.P. and registered representative, Funds
Distributor, Inc., since September 1995. Previously, Vice President, Mesirow
Asset Management, Inc., and registered representative, Mesirow Financial, Inc.
and Mesirow Investment Services, Inc.
- -------------------------
(*) Indicates an "interested person" of Skyline, as defined in the Investment
Company Act of 1940.
11
<PAGE>
MICHAEL MALONEY, 36, SENIOR VICE PRESIDENT. Partner-Senior Securities
Analyst, Skyline Asset Management, L.P., since September 1995. Securities
Analyst, Mesirow Asset Management, Inc., from February 1993 to August 1995, and
prior to joining Mesirow Asset Management, Inc., Securities Analyst, Baker,
Fentress & Company, a closed-end management investment company.
DAREN C. HEITMAN, 31, SENIOR VICE PRESIDENT. Portfolio Manager, Skyline
Asset Management, L.P., since August 1997. Securities Analyst with Skyline
Asset Management, L.P. from September 1995 to August 1997. Securities Analyst
with Mesirow Asset Management, Inc. from May 1994 to August 1995, and Securities
Analyst with Mesirow Financial, Inc. from January 1993 to May 1994. Prior to
joining Mesirow Financial, Inc., Securities Analyst, The Ohio Company, a
regional brokerage firm.
SCOTT C. BLIM, 38, SECRETARY AND TREASURER. Chief Financial Officer,
Skyline Asset Management, L.P., since September 1995. Previously, Vice
President, Director and Chief Administrative Officer, Murray Johnstone
International Limited, an investment adviser.
MICHELE M. BRENNAN, 26, VICE PRESIDENT. Director of Fund Marketing,
Skyline Asset Management, L.P., since August 1996. Previously, Regional
Marketing Associate, Strong Capital Management, an investment adviser.
The address of Messrs. Dutton, Kendall, Kailin, Lutz, Maloney, Heitman and
Blim and Ms. Brennan 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 3800, Chicago,
Illinois 60602; David A. Martin, 135 South LaSalle Street, Chicago, Illinois
60603; and Richard K. Pearson, 401 South Quincy Street, Hinsdale, Illinois
60521.
As of March 31, 1998, the trustees and officers of Skyline owned, in the
aggregate, 79,854 shares of Special Equities Portfolio, 17,793 shares of
Small Cap Value Plus, and 84,501 shares of Small Cap Contrarian, which
represented less than 1% of each of Skyline Special Equities Portfolio and
Skyline Small Cap Value Plus and 1.3% of Skyline Small Cap Contrarian.
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 Funds 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. The following table sets forth compensation paid by Skyline during
the fiscal year ended December 31, 1997, 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.
12
<PAGE>
Aggregate Compensation
Name of Trustee from Skyline Funds
- -------------------------------------------------------------------------------
William L. Achenbach. . . . . . . . . . . . . $8,400
William M. Dutton(1). . . . . . . . . . . . . 0
Paul J. Finnegan. . . . . . . . . . . . . . . 8,400
David A. Martin . . . . . . . . . . . . . . . 8,400
Richard K. Pearson(2) . . . . . . . . . . . . 0
____________________________
(1) Indicates an "interested person" of Skyline, as defined in the 1940 Act.
(2) Mr. Pearson was appointed a trustee of Skyline on February 24, 1998, and,
consequently, received no compensation from Skyline during 1997. Mr.
Pearson's predecessor received $8,400 from Skyline as compensation for
serving as a trustee during 1997.
INVESTMENT ADVISORY SERVICES
The Adviser provides investment advisory and administrative services to
Skyline for Special Equities Portfolio and Small Cap Value Plus pursuant to
Investment Advisory Agreements dated August 31, 1995 and for Small Cap
Contrarian pursuant to an Investment Advisory Agreement dated November 6, 1997
(collectively, 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, Maloney and Kendall, respectively.
AMG is a publicly-traded Delaware corporation which acquires interests in
investment management firms. AMG has its offices at Two International Place,
23rd Floor, Boston, MA 02110. The largest shareholder of AMG is a group of
private equity funds managed by TA Associates, Inc. ("TA") (the address of TA
and each of the private equity funds is High Street Tower, Suite 2500, 125 High
Street, Boston, MA 02110); however, such entities have no power or authority to
participate in the management or operations of the Adviser. It is expected that
AMG will issue additional stock in private and/or public financing transactions
and issue stock in consideration for the acquisition of interests in additional
investment management firms, and it is possible that these private equity funds,
because they are investment funds and not operating companies, may elect to
distribute stock of AMG to investors in such funds. Such issuances or
distributions could have the effect of diluting the interest in AMG of the funds
managed by TA to less than a quarter of the outstanding voting interests in AMG.
Under the Agreements, the Adviser pays all of the Funds' ordinary costs and
expenses attendant to operating the Funds 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 for Small Cap Contrarian were advanced to Skyline by the
Adviser, and Small Cap
13
<PAGE>
Contrarian is reimbursing the Adviser for such expenses in equal installments
without interest over 20 calendar quarters.
Expenses borne by Skyline pursuant to the Agreements, as described above,
that are attributable to a particular Fund are charged to that Fund. Other
expenses of Skyline are allocated among the Funds 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 Funds' ordinary operating
expenses, the Adviser is paid a monthly comprehensive fee from each Fund based
on each Fund's average daily net assets. Under the Agreements, each Fund 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 Fund to the extent that,
in any fiscal year, the aggregate expenses of the Fund, including the advisory
fee, trustees' fees and expenses, and reimbursement of organizational expenses,
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 assets of
Special Equities Portfolio, 2.00% of the average daily net assets of Small Cap
Value Plus, and 1.75% of the average daily net assets of Small Cap Contrarian.
Reimbursement, if any, is made monthly.
Special Equities Portfolio paid comprehensive management fees to the
Adviser and to Skyline's prior investment adviser totaling $5,196,131,
$2,508,468 and $2,890,146 in the years ended December 31, 1997, 1996, and 1995
respectively. Small Cap Value Plus paid comprehensive management fees to the
Adviser and to Skyline's prior investment adviser totaling $1,995,055,
$1,428,303 and $1,407,252 in the years ended December 31, 1997, 1996, and 1995,
respectively. Small Cap Contrarian paid comprehensive management fees to the
Adviser totaling $2,758 for the period from December 15, 1997 until December 31,
1997.
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
Agreement, 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 Fund. The Agreements
are terminable with respect to a Fund without penalty, on 60 days' notice, by
the trustees of Skyline or by vote of a majority of the outstanding shares of
that Fund, or, on not less than 90 days'
14
<PAGE>
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 Fund has a portfolio manager who is responsible
for the day-to-day management of that Fund. Each portfolio manager 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 Small
Cap Value Plus. His team for Small Cap Value Plus includes Mr. Dutton. The
portfolio manager for Small Cap Contrarian is Daren C. Heitman, Senior Vice
President of Skyline. His team for Small Cap Contrarian includes Mr. Dutton and
Mr. Kailin.
Mr. Dutton is the Adviser's Managing Partner and Chief Investment 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 Skyline. 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 Partner-Portfolio Manager of the Adviser. He joined
Mesirow Asset Management, Inc., 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.
Mr. Heitman is a Portfolio Manager of the Adviser and has been a securities
analyst for the Adviser since September 1995. He joined Mesirow Financial, Inc.
as a securities analyst in 1993 after working for approximately two years as a
securities analyst for The Ohio Company, a regional brokerage firm, and became a
securities analyst in 1994 with Mesirow Asset Management, Inc. Mr. Heitman
received a Bachelor of Business Administration degree in Finance from Iowa State
University. 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
15
<PAGE>
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.
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 Funds. 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 Funds are reviewed periodically by Skyline's
board of trustees.
The Adviser is the principal source of information and advice to the Funds
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.
16
<PAGE>
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 Small Cap Value Plus 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:
Fiscal Year Ending December 31,
------------------------------------------------
1997 1996 1995
Special Equities Portfolio
Aggregate commissions $995,672(100%) $857,984(100%) $654,303(100%)
Commissions paid to
affiliates 0 (0%) 0 (0%) 14,544(2.2%)
Small Cap Value Plus
Aggregate commissions $490,153(100%) $541,341(100%) $508,083(100%)
Commissions paid to
affiliates 0 (0%) 0 (0%) 0 (0%)
Small Cap Contrarian paid aggregate brokerage commissions of $12,023 during the
period from December 15, 1997 through December 31, 1997, and aggregate
commissions of $0 to affiliates.
The brokerage commissions paid by Special Equities Portfolio to affiliated
persons during fiscal years 1997, 1996, and 1995 were paid in connection with
transactions aggregating 0%, 0%, and 4%, 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 1997, Special Equities Portfolio paid $905,714 to brokers who furnished
research services, and such brokers effected transactions aggregating 92% of the
aggregate dollar amount of transactions involving the payment of brokerage
commissions by Special Equities Portfolio.
Of the aggregate brokerage commissions that Small Cap Value Plus paid
during fiscal year 1997, $474,637 of that amount was paid to brokers who
furnished research services, and such brokers effected transactions aggregating
96% of the aggregate dollar amount of transactions involving the payment of
brokerage commissions by Small Cap Value Plus. Of the aggregate brokerage
commissions that Small Cap Contrarian paid during the period from December 15,
1997 through December 31, 1997, $10,831 of that amount was paid to brokers who
furnished research services, and such brokers effected transactions aggregating
89% of that
17
<PAGE>
aggregate dollar amount of transactions involving the payment of
brokerage commissions by Small Cap Contrarian.
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," "Purchasing and Redeeming
Shares Through Intermediaries," "Shareholder Services," and "Net Asset Value."
All of that information is incorporated herein by reference.
NET ASSET VALUE. The net asset value of the shares of each Fund 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 Fund is determined by dividing the value
of all its securities and other assets, less its liabilities, by the number of
shares of the Fund 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 have 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, Martin Luther King's Birthday, Washington's
Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, and Christmas Day.
REDEMPTION IN KIND. With respect to each Fund, 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 Fund 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 Fund 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.
18
<PAGE>
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 Fund is a separate entity for purposes of determining federal tax
treatment. Skyline intends for each Fund 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 Funds. 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 Fund.
DISTRIBUTOR. The shares of each Fund are offered for sale on a continuous
basis through Funds Distributor, Inc. ("Distributor"), without any sales
commissions or charges to the Funds 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 Fund 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 Funds, all expenses in connection with registration of shares of
the Funds 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.
19
<PAGE>
As agent, the Distributor offers shares of each Fund 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 Funds' 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 Funds. Those amounts, if any, are described under "Portfolio Transactions
and Brokerage."
The Distributor is a selling agent for two series of Firstar 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 Funds
through the exchange privilege described in the Prospectus.
FINANCIAL STATEMENTS
Copies of the 1997 annual reports of Special Equities Portfolio, Small Cap
Value Plus, and Small Cap Contrarian 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 the annual report for each Fund 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.
20
<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
DECEMBER 31, 1997
<PAGE>
LETTER FROM WILLIAM M. DUTTON, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
January 31, 1998
Dear Shareholder:
The 1997 return for the Fund showed a gain of 35.43%, far exceeding the 22.36%
gain registered by the Russell 2000 Index. For the fourth quarter of 1997, the
Fund showed a loss of 4.19%, slightly more than the 3.35% loss experienced by
the Russell 2000 Index. The net asset value closed the year at $21.66 per share,
following a distribution of $2.89 per share in mid-December. The distribution
consisted of $1.05 per share of long-term capital gain and $1.84 per share of
short-term capital gain. The excellent performance for the year was due to good
stock selection, favorable sector weightings, an investment style that was in
vogue, and a strong economy that enabled many companies to report improved
earnings.
MARKET REVIEW
The big news of the fourth quarter was the financial crisis in Asia, highlighted
by weak currencies and falling overseas stock markets. The United States stock
market declined sharply in October and spent the remainder of the quarter
attempting to recover those losses. Large cap stocks, as measured by the S&P 500
Index, managed to recoup all of their losses and finish with a gain for the
quarter. Unfortunately, small cap stocks, as measured by the Russell 2000 Index,
showed only a marginal gain from the October lows and finished the quarter in
negative territory. In times of perceived financial crisis, such as the Asian
situation today, a dichotomy in performance often occurs because investors
typically feel more comfortable owning large blue chip stocks. Once the crisis
atmosphere dissipates, small cap stocks generally show improved performance.
The Asian crisis also had an impact on sector performance in the fourth quarter.
Noncyclical stocks were strong and cyclical stocks were weak due to the
perception that the Asian crisis would slow economic growth around the world and
negatively impact the earnings of U.S. companies. Also, long-term interest rates
declined due to the belief that the Asian crisis would have a deflationary
effect on the economy. Utilities and financial stocks, beneficiaries of
declining interest rates and investors' interest in noncyclical stocks, were the
standouts for the quarter.
Small cap stocks underperformed large cap stocks for the fourth consecutive
year, as the S&P 500 gained 33.38% compared to the 22.36% gain for the Russell
2000 Index. This result was surprising since small cap stocks seemed to have
several advantages during 1997, including attractive relative valuation,
superior earnings growth since mid-year, less exposure to weak Asian economies,
and less negative impact from the strong U.S. dollar. However, these advantages
apparently were not enough to compensate for investors' preference for "safe"
blue chip stocks.
ANNUAL REPORT - DECEMBER 31, 1997 1
<PAGE>
In terms of investment styles, small cap value investing did much better than
small cap growth investing in 1997. Small cap value did well partly due to the
strength in the U.S. economy and its positive impact on those industries in
which small cap managers tend to invest. Also, financial stocks, a favorite area
for value managers, were among the best performing in the market. Growth stock
managers, on the other hand, were hurt by their preference for technology and
health care stocks, which did quite poorly for the year. Also, we believe that
price/earnings multiple compression hurt the returns of many high multiple
growth stocks.
PORTFOLIO REVIEW
The Fund showed a loss of 4.19% for the fourth quarter. The Fund was hurt by its
exposure to economically sensitive stocks, which did poorly due to investors'
preference for noncyclical issues. Also, a number of stocks showed
larger-than-normal declines due to either fundamental problems or price setbacks
following big advances earlier in the year. In most cases we believe these
stocks will recover and show their full value in the future. The financial
services sector of the Fund was a notable underperformer for the period, showing
a loss for the quarter while financial stocks in the Russell 2000 Index did well
overall. These negatives were partially offset by generally good stock selection
in most sectors of the Fund.
For the year, the Fund showed a gain of 35.43% compared to a gain of 22.36% for
the Russell 2000 Index. The primary reason for the strong year was good stock
selection, as the Fund had numerous large gainers and relatively few large
losers. Winning stocks came from many different industries and usually resulted
from individual companies performing well fundamentally. Stock selection was
helped by a favorable economy that allowed many companies to report improved
earnings. In terms of sector weightings, the Fund benefited from low weightings
in technology and health care stocks, two of the weakest performing sectors in
the market. However, through most of the year, the Fund was modestly
underweighted in financial stocks, one of the strongest sectors of the year.
Two themes stand out as being most important today. First, the Fund has a large
weighting in economically sensitive stocks and will benefit most from strength
in the consumer and industrial parts of the economy. Second, a large part of the
Fund is invested in restructuring situations, companies that have hired new CEOs
to improve profitability. These situations are less dependent on the economy and
more dependent on company specific initiatives.
2 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
OUTLOOK
We are cautiously optimistic about prospects for the Fund over the next year.
Small cap stocks as a group are trading at very attractive valuation levels
compared to large cap stocks. At the same time, fundamentals seem to favor small
cap stocks since the domestic economy is strong and they are not as affected by
the international problems that currently impact large multinational companies.
Our enthusiasm is restrained only because overall stock market valuations are
high and economic conditions seem as if they cannot get much better. It is at
times like this that stocks often peak. Regardless of near-term market
movements, however, we believe that our small cap value-oriented approach will
yield good returns to investors over the long term.
/s/ William M. Dutton
CHANGE IN VALUE OF A $10,000 INVESTMENT(1)
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT SINCE INCEPTION
[CHART]
Special Equities Russell 2000 S&P 500
4/23/87 10,000 10,000 10,000
1987 8,314 7,567 8,794
1988 10,787 9,449 10,247
1989 13,377 10,986 13,469
1990 12,135 8,843 13,037
1991 17,885 12,914 17,018
1992 25,470 15,294 18,325
1993 31,289 18,184 20,158
1994 30,929 17,582 20,424
1995 35,206 22,932 28,087
1996 45,897 26,715 34,617
1997 62,161 32,663 46,172
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at the end of this section.
ANNUAL REPORT - DECEMBER 31, 1997 3
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q
1997 1997 3 yrs.
<S> <C> <C> <C>
SPECIAL EQUITIES -4.19 35.43 26.20
RUSSELL 2000 -3.35 22.36 22.33
S&P 500 2.84 33.38 31.24
<CAPTION>
Calendar Years
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
SPECIAL EQUITIES 35.4 30.4 13.8 -1.2 22.9
RUSSELL 2000 22.4 16.5 28.4 -1.8 18.9
S&P 500 33.4 23.3 37.5 1.3 10.0
</TABLE>
SECTOR WEIGHTINGS (as of December 31, 1997)
- --------------------------------------------------------------------------------
[CHART]
<TABLE>
<S> <C>
Autos & Transportation 11.5%
Cash 5.4%
Technology 3.5%
Producer Durables 11.5%
Materials & Processing 13.3%
Health Care 4.2%
Financial Services 15.2%
Energy 4.1%
Consumer Discretionary 29.7%
Consumer Staples 1.6%
</TABLE>
4 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
5 yrs. 10 yrs. Inception(2)
<S> <C> <C> <C>
SPECIAL EQUITIES 19.54 22.28 18.63
RUSSELL 2000 16.41 15.76 11.71
S&P 500 20.30 18.04 15.38
</TABLE>
<TABLE>
<CAPTION>
Calendar Years
1992 1991 1990 1989 1988 1987(2)
<S> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES 42.5 47.4 -9.3 24.0 29.7 -16.9
RUSSELL 2000 18.4 46.1 -19.5 16.2 24.9 -24.3
S&P 500 7.7 30.6 -3.2 31.4 16.5 -12.0
</TABLE>
SECTOR PERFORMANCE (as of December 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q 1997 1997
------------------ ------------------
SPECIAL RUSSELL SPECIAL RUSSELL
EQUITIES 2000 EQUITIES 2000
<S> <C> <C> <C> <C>
CONSUMER STAPLES 20.5% 3.9% -15.0% 40.1%
-------------------------------------------------
OTHER 0.0 2.0 0.0 33.2
-------------------------------------------------
UTILITIES 0.0 13.7 23.7 35.6
-------------------------------------------------
HEALTH CARE -0.9 -7.2 24.5 10.3
-------------------------------------------------
FINANCIAL SERVICES -1.5 5.8 45.6 36.0
-------------------------------------------------
PRODUCER DURABLES -3.2 -9.4 58.5 26.3
-------------------------------------------------
TECHNOLOGY -4.4 -16.0 51.7 1.3
-------------------------------------------------
CONSUMER DISCRETIONARY -4.7 -3.3 37.5 21.4
-------------------------------------------------
MATERIALS & PROCESSING -6.3 -7.3 41.1 13.1
-------------------------------------------------
AUTOS & TRANSPORTATION -10.4 -3.1 8.3 31.3
-------------------------------------------------
ENERGY -11.3 -16.0 31.4 14.4
-------------------------------------------------
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 5
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL
EQUITIES RUSSELL 2000 S&P 500
<S> <C> <C> <C>
P/E RATIO (MEDIAN) 17.1 21.9 21.6
PRICE/BOOK 2.36 2.85 4.11
PRICE/SALES 0.81 1.47 1.77
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 15.4% 21.4% 12.6%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $410 million $750 million $34 billion
PORTFOLIO VALUE $467 million $873 billion $7,536 billion
NUMBER OF HOLDINGS 84 1,894 500
- --------------------------------------------------------------------------------
TICKER SYMBOL: SKSEX
CUSIP #: 830833208
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</TABLE>
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
INTERNATIONAL MULTIFOODS CORP. (IMC)
International Multifoods operates food manufacturing and foodservice
distribution businesses in the United States, Canada, and Venezuela. IMC is
experiencing a dramatic improvement in profitability as a result of steps taken
by the company's new CEO, Gary Costley. Costley was previously the president of
Kellogg Company's North America division, which has over $4 billion in revenues.
IMC is expected to continue to show rapid earnings growth through margin
enhancement driven by the reduction of overhead, elimination of unprofitable
product lines, and better asset utilization. IMC is inexpensive relative to its
$130 per share in sales and earnings power of $3.00 per share.
MAGNETEK, INC. (MAG)
MagneTek is a manufacturer of magnetic and electrical products, including
lighting ballasts, electric motors, generators, and power supplies. MAG is
currently in the early stages of a turnaround in its operations led by Ronald
Hoge, who was named president and CEO of MAG in July 1996. Prior to joining MAG,
Hoge was president of the Aerospace Equipment Systems Division of AlliedSignal,
Inc., which has over $2 billion in revenues. Hoge brings a bottom-line focus and
strong operating management skills to a firm that historically was operated with
the goal of growing the top line. Earnings are expected to grow rapidly over the
next several years as management improves margins from their currently depressed
levels by consolidating operations, reducing overhead, and moving manufacturing
to low-cost locations. At current price levels, MAG is inexpensive relative to
its earnings power of over $2.50 per share.
6 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS(3) % OF NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
FURON COMPANY
Polymer-based products 2.1%
DELPHI FINANCIAL GROUP, INC.
Accident & health insurance 2.0%
ALLIED GROUP, INC.
Personal lines insurance 1.8%
MAGNETEK, INC.
Integrated electrical products 1.7%
IHOP CORP.
Restaurant operator 1.7%
INTERPOOL, INC.
Container leasing firm 1.7%
FINGERHUT COMPANIES, INC.
Catalog retailer 1.6%
UNITED STATIONERS INC.
Office products distributor 1.6%
ONEIDA LTD.
Tableware/flatware 1.6%
FREMONT GENERAL CORP.
Workers' compensation insurance 1.5%
TOP TEN HOLDINGS 17.3%
</TABLE>
NOTES TO PERFORMANCE
(1) The performance for the one, three, five, and ten years ended December 31,
1997, and for the period April 23, 1987 (inception) through December 31,
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.
Special Equities Portfolio closed to new investors on January 30, 1997.
Source: 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.
ANNUAL REPORT - DECEMBER 31, 1997 7
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 10.4%
AUTO RELATED - 3.4%
APS Holding Corp. (a) Aftermarket auto parts dist. 39,000 $ 97,500
Delco Remy International, Inc.(a) Starters & alternators 337,600 4,220,000
Excel Industries, Inc. OEM auto parts supplier 243,600 4,400,025
Intermet Corp. Metal castings 397,800 6,961,500
-----------
15,679,025
OTHER TRANSPORTATION - 5.6%
Interpool, Inc. Container leasing firm 523,500 7,754,343
Kitty Hawk, Inc.(a) Air freight services 287,000 5,524,750
Monaco Coach Corp.(a) RV producer 174,200 4,442,100
Pittston Burlington Group Air freight services 218,500 5,735,625
Trailer Bridge, Inc.(a) Marine transportation 316,800 2,811,600
-----------
26,268,418
TRUCKING - 1.4%
Landstar System, Inc.(a) Truckload carrier 246,300 6,496,162
-----------
TOTAL AUTOS & TRANSPORTATION 48,443,605
CONSUMER DISCRETIONARY - 29.7%
APPAREL/TEXTILES - 1.0%
Kellwood Co. Apparel maker 156,500 4,695,000
COMMERCIAL SERVICES - 6.1%
Bell & Howell Co.(a) Info services/mailing eqpt. 196,200 4,745,588
Borg-Warner Security Corp. Alarm/guard services 344,800 6,077,100
Harland (John H.) Co. Check printing 217,200 4,561,200
New England Business
Service, Inc. Business forms firm 174,300 5,882,625
United Stationers Inc.(a) Office products distributor 154,800 7,449,750
-----------
28,716,263
CONSUMER PRODUCTS/SERVICES - 7.5%
Carmike Cinemas, Inc.(a) Cinema operator 156,000 4,475,250
Furniture Brands Intl, Inc.(a) Furniture manufacturer 322,700 6,615,350
Gibson Greetings, Inc.(a) Greeting cards 227,400 4,974,375
Harman Intl. Industries, Inc. Audio equipment 112,100 4,757,244
Libbey Inc. Glass tableware 180,200 6,825,075
Oneida Ltd. Tableware/flatware 271,500 7,245,656
-----------
34,892,950
PRINTING/PUBLISHING - 1.9%
Cadmus Communications Corp. Commercial printer 82,900 1,699,450
World Color Press, Inc.(a) Commercial printer 270,200 7,177,187
-----------
8,876,637
</TABLE>
8 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
RESTAURANTS - 4.8%
IHOP Corp.(a) Restaurant operator 242,300 $ 7,874,750
O'Charley's Inc.(a) Casual dining 214,900 3,760,750
Ryan's Family Steak
Houses, Inc.(a) Casual dining 605,000 5,180,313
Sonic Corp.(a) Fast-food restaurants 195,800 5,506,875
-----------
22,322,688
RETAIL - 8.4%
Charming Shoppes, Inc.(a) Women's apparel 864,100 4,050,469
Discount Auto Parts, Inc.(a) Auto parts stores 277,600 5,309,100
Fabri-Centers of America, Inc.(a) Fabric/craft stores 135,000 3,012,187
Fingerhut Companies, Inc. Catalog retailer 349,700 7,474,836
Finlay Enterprises, Inc.(a) Leased jewelry departments 197,600 4,495,400
Heilig-Meyers Co. Furniture store operator 455,400 5,464,800
Tractor Supply Co.(a) Farm-related products 303,300 4,473,675
Zale Corp.(a) Jewelry retailer 221,500 5,094,500
-----------
39,374,967
-----------
TOTAL CONSUMER DISCRETIONARY 138,878,505
CONSUMER STAPLES - 1.6%
International Multifoods Corp. Foodservice distribution 211,000 5,973,938
ProSource, Inc.(a) Foodservice distribution 198,800 1,491,000
-----------
TOTAL CONSUMER STAPLES 7,464,938
ENERGY - 4.1%
EXPLORATION & PRODUCTION - 2.0%
Comstock Resources, Inc.(a) Oil & gas producer 437,000 5,216,688
Swift Energy Co.(a) Oil & gas producer 208,690 4,395,533
-----------
9,612,221
OTHER ENERGY - 2.1%
MarkWest Hydrocarbon, Inc.(a) Natural gas processing 252,200 5,548,400
Willbros Group Inc.(a) Engineering/construction 274,300 4,114,500
-----------
9,662,900
-----------
TOTAL ENERGY 19,275,121
FINANCIAL SERVICES - 15.2%
INSURANCE - 14.4%
Allied Group, Inc. Personal lines insurance 290,175 8,306,259
American Heritage Life
Investment Life insurance firm 199,900 7,196,400
Blanch (E.W.) Holdings, Inc. Reinsurance brokerage 185,800 6,398,488
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 9
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997 (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
Chartwell Re Corporation P & C reinsurance 135,200 $ 4,563,000
Delphi Financial Group, Inc. Accident & health insurance 204,606 9,207,270
Financial Security Assurance
Holdings Municipal bond insurance 129,800 6,262,850
Fremont General Corp. Workers' comp. insurance 131,500 7,199,625
Highlands Insurance
Group, Inc.(a) P & C insurance 249,400 7,076,725
Horace Mann Educators Corp. P & C insurance 210,800 5,994,625
SCPIE Holdings Inc. Medical malpractice ins. 170,300 4,928,056
-----------
67,133,298
OTHER FINANCIAL SERVICES - 0.8%
MoneyGram Payment
Systems Inc.(a) Wire transfer services 354,700 3,813,025
-----------
TOTAL FINANCIAL SERVICES 70,946,323
HEALTH CARE - 4.2%
HEALTH CARE SERVICES - 3.1%
Sierra Health Services, Inc.(a) Health maintenance organ. 116,800 3,927,400
Trigon Healthcare, Inc.(a) Health maintenance organ. 210,700 5,504,538
United Payors & United
Providers, Inc.(a) Health care intermediary 260,200 5,008,850
-----------
14,440,788
MEDICAL EQUIPMENT/PRODUCTS - 1.1%
Marquette Medical
Systems, Inc.(a) Monitoring equipment 191,100 5,088,037
-----------
TOTAL HEALTH CARE 19,528,825
MATERIALS & PROCESSING - 13.3%
BUILDING/CONSTRUCTION PRODUCTS - 4.7%
Ameron International Corp. Concrete pipe/coatings 91,000 5,755,750
Chicago Bridge & Iron Co. Maker of steel tanks 350,500 5,695,625
Dayton Superior Corp.(a) Concrete accessories 258,400 4,263,600
Interface, Inc. Carpet producer 203,000 5,887,000
International Comfort
Products Corp.(a) Heating & cooling products 34,600 289,775
-----------
21,891,750
INDUSTRIAL PRODUCTS - 2.1%
Furon Company Polymer-based products 464,400 9,694,350
METAL FABRICATIONS - 1.5%
Citation Corp.(a) Castings manufacturer 433,900 7,050,875
</TABLE>
10 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
PACKAGING/PAPER - 2.0%
BWAY Corp.(a) Metal cans/containers 240,000 $ 5,490,000
FiberMark, Inc.(a) Fiber-based materials 173,300 3,725,950
-----------
9,215,950
SPECIALTY CHEMICALS - 2.0%
Lilly Industries, Inc. Industrial coatings/chemicals 212,300 4,378,688
Synthetic Industries, Inc.(a) Industrial fibers 211,500 5,234,625
-----------
9,613,313
STEEL/IRON - 1.0%
Birmingham Steel Corp. Steel mini-mill 297,700 4,688,776
-----------
TOTAL MATERIALS & PROCESSING 62,155,014
PRODUCER DURABLES - 11.5%
MACHINERY - 4.7%
Alamo Group, Inc. Grounds maintenance eqpt. 107,300 2,327,069
Applied Industrial
Technologies Industrial prods. distributor 242,250 6,480,187
Binks-Sames Corp. Spray coating equip 103,600 4,377,100
Brown & Sharpe Mfg. Co.(a) Metrology instruments 330,800 3,370,025
DT Industries, Inc. Packaging equipment 161,400 5,487,600
-----------
22,041,981
OTHER PRODUCER DURABLES - 6.8%
General Cable Corp. Wire & cable producer 197,200 7,136,175
LSI Industries Inc. Lighting/graphics products 217,800 3,974,850
MagneTek, Inc.(a) Integrated electrical prods. 415,600 8,104,200
Tokheim Corp.(a) Gas station pumps/eqpt. 270,800 5,602,175
TriMas Corp. Diversified manufacturer 197,000 6,771,875
-----------
31,589,275
-----------
TOTAL PRODUCER DURABLES 53,631,256
TECHNOLOGY - 3.5%
BancTec Inc.(a) Financial software/eqpt. 262,600 7,040,963
GENICOM Corp.(a) Computer support services 330,900 3,805,350
Microsemi Corp.(a) Semiconductor producer 251,200 4,411,700
PSC Inc.(a) Bar coding equipment 70,800 933,675
-----------
TOTAL TECHNOLOGY 16,191,688
-----------
TOTAL COMMON STOCKS - 93.5%
(Cost: $364,712,039) 436,515,275
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 11
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997 (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
CONVERTIBLE BOND
AUTOS & TRANSPORTATION - 1.1%
Atlantic Coast Airlines, Inc.(b)
7.0%, Due 7/1/04 Regional airline $2,935,000 $ 5,139,919
-----------
TOTAL CONVERTIBLE BOND
(Cost: $2,935,428) 5,139,919
MONEY MARKET INSTRUMENTSC
Yield 5.32% to 5.64%
due January 1998 to September 1998
American Family Financial Services 486,000
General Mills, Inc. 1,340,964
Johnson Controls, Inc. 16,614,439
Pitney Bowes Credit Corp. 3,598,909
Sara Lee Corp. 32,638
Warner Lambert Corp. 1,246,622
-----------
TOTAL MONEY MARKET INSTRUMENTS - 5.0%
(Cost: $23,319,572) 23,319,572
-----------
TOTAL INVESTMENTS - 99.6%
(Cost: $390,967,039) 464,974,766
OTHER ASSETS LESS LIABILITIES - 0.4% 2,094,924
-----------
NET ASSETS - 100.0% $467,069,690
------------
------------
</TABLE>
(a) Non-income producing security.
(b) The following security may require registration under the Securities Act of
1933 or an exemption therefrom in order to effect sale in the ordinary course of
business. This security is valued at fair market supplied by a pricing source or
brokers. If not available, then the security value is determined in good faith
by the Skyline Funds' Board of Trustees. At December 31, 1997, the aggregate
value of the Fund's restricted security was $5,139,919, which represented 1.1%
of net assets.
<TABLE>
<CAPTION>
Security Description Date of Acquisition Principal Amount Unit cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Atlantic Coast Airlines, Inc. 6/27/97 $2,935,000 $100.01
7.00%, Due 2004
- --------------------------------------------------------------------------------
</TABLE>
(c) Variable rate securities. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on December 31, 1997.
Based on cost of investments for federal income tax purposes of $390,967,039 on
December 31, 1997, net unrealized appreciation was $74,007,727, consisting of
gross unrealized appreciation of $86,920,370 and gross unrealized depreciation
of $12,912,643.
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $390,967,039) $ 464,974,766
Receivable for:
Securities sold $ 751,024
Dividends and interest 326,501
Shares sold 2,384,158 3,461,683
----------- -------------
Total assets 468,436,449
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 517,726
Shares redeemed 271,550
Comprehensive management fee 564,293
Trustees' fee 489
Other liabilities 12,701 1,366,759
----------- -------------
Net assets applicable to shares outstanding $ 467,069,690
-------------
-------------
Shares outstanding--no par value
(unlimited number of shares authorized) 21,567,101
-------------
-------------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 21.66
-------------
-------------
ANALYSIS OF NET ASSETS
Paid-in capital $ 390,433,509
Undistributed net realized gain on
sales of investments 2,628,454
Unrealized appreciation of investments 74,007,727
-------------
Net assets applicable to shares outstanding $ 467,069,690
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 13
<PAGE>
STATEMENT OF OPERATIONS Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 2,398,966
Interest 1,366,545
-------------
Total investment income 3,765,511
Expenses:
Comprehensive management fee 5,196,131
Fees to unaffiliated trustees 20,643
-------------
Total expenses 5,216,774
-------------
Net investment loss (1,451,263)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 54,539,741
Net change in unrealized appreciation 45,751,321
-------------
Net realized and unrealized gain on investments 100,291,062
-------------
Net increase in net assets resulting from operations $ 98,839,799
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
14 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/97 12/31/96
------------- -------------
<S> <C> <C>
From operations:
Net investment loss $ (1,451,263) $ (537,572)
Net realized gain on sales of
investments 54,539,741 36,985,981
Net change in unrealized appreciation 45,751,321 8,160,180
------------- -------------
Net increase in net assets resulting
from operations 98,839,799 44,608,589
Distributions to shareholders from
net realized gains (54,133,704) (33,540,295)
From share transactions:
Proceeds from shares sold 210,895,971 68,600,112
Reinvestment of capital gain
distributions 52,981,301 32,987,339
Payments for shares redeemed (60,994,053) (60,788,388)
Redemption in-kind - (7,286,453)
------------- -------------
Net increase in net assets resulting
from share transactions 202,883,219 33,512,610
------------- -------------
Total increase in net assets 247,589,314 44,580,904
Net assets at beginning of year 219,480,376 174,899,472
------------- -------------
Net assets at end of year $ 467,069,690 $ 219,480,376
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 15
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of year $ 18.16 $ 16.79 $ 15.64 $ 17.83 $ 17.12
-------- -------- -------- -------- --------
Income from Investment
Operations
Net investment loss (0.07) (0.04) (0.06) (0.08) (0.09)
Net realized and unrealized
gain (loss) on investments 6.46 5.02 2.21 (0.18) 3.94
-------- -------- -------- -------- --------
Total from Investment
Operations 6.39 4.98 2.15 (0.26) 3.85
-------- -------- -------- -------- --------
Less distributions from net
realized gains on investments (2.89) (3.61) (1.00) (1.93) (3.14)
-------- -------- -------- -------- --------
Net asset value at end of year $ 21.66 $ 18.16 $ 16.79 $ 15.64 $ 17.83
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return 35.43% 30.37% 13.83% (1.15%) 22.85%
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.48% 1.51% 1.51% 1.49% 1.48%
Ratio of net investment
loss to average net
assets (0.41%) (0.32%) (0.35%) (0.49%) (0.54%)
Portfolio turnover rate 62% 130% 71% 82% 104%
Net assets, end of year
(in thousands) $467,070 $219,480 $174,899 $202,771 $228,011
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Average commission rate paid on stock transactions for the year ended December
31, 1997 and December 31, 1996 was $0.0601 and $0.0636 per share, respectively.
Effective August 31, 1995, the Fund's Investment Adviser changed from Mesirow
Asset Management, Inc., to Skyline Asset Management, L.P.
Note: Total return does not reflect the effect of any sales charges which may
have been previously charged.
See accompanying notes to financial statements.
16 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Skyline Funds is an open-ended, diversified investment management company which
consists of Special Equities Portfolio, Special Equities II, and Small Cap
Contrarian. The Funds commenced public offering of their shares as follows:
Special Equities Portfolio on April 23, 1987, Special Equities II on February 9,
1993, and Small Cap Contrarian on December 15, 1997. The following notes relate
solely to the accompanying financial statements of Special Equities Portfolio
("Fund"). Skyline Special Equities Portfolio closed to new investors on January
30, 1997.
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. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline 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 Skyline Funds expenses, such as trustees' fees, are allocated among
the three Skyline Funds.
/ / RECLASSIFICATION - The 1997 net investment loss of $1,451,263 has been
offset against undistributed net realized gains at December 31, 1997.
ANNUAL REPORT - DECEMBER 31, 1997 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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 comprehensive management
fee charged for the year ended December 31, 1997 was $5,196,131.
Certain officers and trustees of the Skyline Funds are also officers, limited
partners or shareholders of limited partners of the Adviser. The Fund makes no
direct payments to the officers or trustees who are affiliated with the Adviser.
For the year ended December 31, 1997, fees of $20,643 were paid by the Fund to
the unaffiliated trustees.
3
REDEMPTION IN-KIND
On September 30, 1996 the Fund transferred to a shareholder, in payment of the
proceeds of a redemption of Fund shares on that date, investments with a market
value of $6,777,575 and a cost basis of $5,691,096 and $508,878 was paid in
cash.
18 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
- --------------------------------------------------------------------------------
4
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
12/31/97 12/31/96
----------------------------
<S> <C> <C>
Shares sold 9,851,723 3,541,731
Shares issued
in reinvestment of dividends 2,483,873 1,876,407
----------------------------
12,335,596 5,418,138
Less shares redeemed (2,855,781) (3,385,587)
Less shares redeemed in-kind - (363,595)
----------------------------
Net increase in shares outstanding 9,479,815 1,668,956
----------------------------
----------------------------
</TABLE>
5
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1997, are as follows:
<TABLE>
<S> <C>
Cost of purchases $342,898,547
Proceeds from sales 206,015,483
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders of Skyline Special Equities Portfolio
and the Board of Trustees of Skyline Funds
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Special Equities Portfolio as of
December 31, 1997, 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, 1997 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, 1997, 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 16, 1998
20 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FEDERAL TAX STATUS OF 1997 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, 1997
- --------------------------------------------------------------------------------
This report, including the audited 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.
ANNUAL REPORT - DECEMBER 31, 1997 21
<PAGE>
This page left blank intentionally.
22 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
This page left blank intentionally.
ANNUAL REPORT - DECEMBER 31, 1997 23
<PAGE>
This page left blank intentionally.
24 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FOR 24-HOUR SKYLINE FUNDS PRICES CALL: 1.800.828.2SKY
(1.800.828.2759)
TO SPEAK WITH A SKYLINE FUNDS REPRESENTATIVE
DURING NORMAL BUSINESS HOURS CALL: 1.800.458.5222
- --------------------------------------------------------------------------------
[LOGO]
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
<PAGE>
[LOGO]
SKYLINE FUNDS
FOR 24-HOUR SKYLINE FUNDS PRICES CALL: 1.800.828.2SKY
(1.800.828.2759)
TO SPEAK WITH A SKYLINE FUNDS REPRESENTATIVE
DURING NORMAL BUSINESS HOURS CALL: 1.800.458.5222
[PICTURE]
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 generally more than 15%
- Focus on "neglected" companies - limited
Wall Street research coverage
- Market cap range of $400 million to $2
billion
[LOGO]
SKYLINE FUNDS
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
DECEMBER 31, 1997
<PAGE>
LETTER FROM KENNETH S. KAILIN, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
January 31, 1998
Dear Shareholder:
We are pleased to report that, for the year ended December 31, 1997, the Fund
rose 26.21%. This marks the third consecutive year of annual returns in excess
of 20% for the Fund. The Fund's 1997 return compares favorably to our primary
benchmark, the Russell 2000 Index, which rose 22.36% in 1997. The Fund also
performed well relative to the average small stock mutual fund which returned
20.75% in 1997 and the average stock mutual fund which returned 24.36%,
according to Lipper Analytical Services, Inc. The net asset value closed the
year at $12.75 per share, following a distribution of $2.29 per share in mid-
December. The distribution consisted of $1.04 per share of long-term capital
gain and $1.25 per share of short-term capital gain.
The final three months of 1997 were generally weaker periods for smaller stocks
due to Asian-related fears, worries over slowing corporate profit growth, and
seasonal profit taking. The Fund was not immune to these forces and dropped
modestly during this period. For the quarter ending December 31, 1997, the Fund
declined 3.40%. The Russell 2000 Index recorded a similar decline of 3.35%. The
average small stock mutual fund fell 4.97% in the quarter, according to Lipper
Analytical Services, Inc.
MARKET REVIEW
The backdrop for the stock market in 1997 was almost perfect. The economy was
strong with solid GDP growth, low unemployment, and high consumer confidence.
Normally, inflation and interest rates rise in this type of situation, but this
did not occur. In fact, inflation fell as did interest rates. Economists tell us
fierce price competition due to imports and improved productivity by businesses
helped continue this "Goldilocks" economy (not too hot and not too cold). This
proved to be a great environment for business profits and thus stock market
returns.
Early in the year, large companies showed better profit growth compared with
smaller companies due mainly to overseas growth. However, beginning in the
summer, large company growth began to show signs of slowing due to foreign
currency issues. As a result, smaller stocks, which are tied more closely to the
U.S. economy, did much better than large stocks in the third quarter. During the
fourth quarter, large companies proved to be a safe haven, as concerns over the
global crisis in Asia mounted. In addition, institutional window dressing and
seasonal tax selling exerted further pressure on smaller stocks in the final
quarter. As a result of the above issues, both small stocks and large stocks
reported great absolute returns in 1997, but large company stocks performed
better.
In the small stock arena, value-oriented investors clearly outperformed growth-
oriented investors during both the year and the fourth quarter. Value buyers
tend to concentrate more heavily in economically sensitive and financially
sensitive areas, such as industrial manufacturing and insurance companies.
Strong U.S. growth helped domestic-based industrial companies, while falling
interest rates helped financial-based businesses. Growth investors, conversely,
generally focus on fast-paced technology and health care stocks. These areas
were volatile during the year and faced the challenge of severe pricing pressure
and unstable demand. As a result, the value approach largely worked better than
the growth approach in 1997.
ANNUAL REPORT - DECEMBER 31, 1997 1
<PAGE>
1997 ANNUAL REVIEW
The strong economic backdrop led to superb stock market gains in 1997. The gains
were widespread. The Russell 2000's best performing economic sectors were
consumer staples, financial services, and utilities. Each of these sectors was
up more than 30% for the year. The worst performing sector was technology, up
1% for 1997.
The Fund's results were even better, as financial services stocks and autos and
transportation stocks were up over 40% for the year. Some sectors of the Fund
performed significantly better than the corresponding benchmark sector
performance. Particularly noteworthy were autos and transportation, consumer
discretionary, health care, and technology.
A large percentage of the portfolio's holdings were in financial services and
consumer discretionary stocks throughout the course of 1997. These two sectors
provided the Fund with returns of over 30% in 1997.
FOURTH QUARTER REVIEW
As previously noted, small company stocks were generally weak in the fourth
quarter. Based on the Russell 2000 Index, the weakest areas were energy and
technology. Both sectors were down over 15%. The only four sectors reporting
positive returns were utilities, consumer staples, financial services, and
other. Utilities stocks were particularly robust, registering a gain of almost
14% in the quarter.
The Fund's negative fourth quarter return primarily related to several poor
performing sectors. Falling energy prices led to negative energy stock
performance. In addition, our technology stocks were impacted by Asian concerns,
and our consumer stock holdings were down modestly on weak holiday shopping
reports. While the Fund did not hold a large percentage of poor performing
energy or technology stocks, exposure to the weak consumer group was over 25% of
the portfolio's holdings.
The quarterly return for the Fund was essentially the same as our benchmark.
However, we strive to beat our benchmark each quarter and thus we were not
satisfied with the results. A few disappointing individual stock selections in
several industries constrained performance this quarter. In addition, the Fund
was hurt by having no exposure to utilities, the best sector in the fourth
quarter. Fortunately, sizable holdings in positive performing financial stocks
along with some strong performing new stock purchases helped the Fund
considerably.
OUTLOOK
Presently it appears that the U.S. economy may slow marginally from the 1997
pace, as pressures from Asia and recent weak consumer spending trends take hold.
However, inflation continues to be tame, and low long-term interest rates should
encourage growth. Thus, most economists predict another year of slow, but
steady, growth. This should again provide a positive environment for stock
prices. However, the U.S. stock market has put together a very unusual string of
three consecutive years of great performance, and most valuation measures
indicate the market carries more potential risk than return. Therefore, our
return expectations are generally more modest for 1998.
2 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
Large companies, as measured by the S&P 500 Index, have now outperformed small
companies, as measured by the Russell 2000 Index, for four consecutive years.
Stock prices tend to follow profit growth, and in recent years, large companies
appear to have been growing faster. While not conclusive, it appears that large
companies have been growing their profits faster than smaller companies for two
central reasons. First, large companies with sizable international exposure
benefited from strong overseas growth opportunities. Second, large companies
have done a better job of reducing costs through the use of technology,
outsourcing cost centers, and improving manufacturing processes.
Based on expectations of poor international market conditions due to weak demand
and currency problems, smaller domestic companies should have an advantage in
future periods. In addition, smaller companies are rapidly following the trends
set by larger companies by embarking on cost saving programs, which include new
technology, outsourcing, and better manufacturing processes. Thus, we believe
the fortunes of smaller companies are looking brighter than in the recent past.
Only time will tell if better relative profit growth comes to fruition for
smaller companies.
If the U.S. economy slows marginally in 1998, then investors may likely attach
more importance to profit growth. The Fund focuses on smaller companies with
above average growth prospects and below average valuations and thus would
appear to be well positioned for a slower growth environment.
/s/ illegible
CHANGE IN VALUE OF A $10,000 INVESTMENT(1)
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
Special Russell
Equities II 2000 S&P 500 S&P 400
----------- ------- ------- -------
<S> <C> <C> <C> <C>
2/9/93 10000 10000 10000 10000
1993 11008 11376 10732 11174
1994 10841 11169 10874 10774
1995 13112 14346 14953 14108
1996 16599 16712 18431 16819
1997 20950 20448 24582 22246
</TABLE>
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at the end of this section.
ANNUAL REPORT - DECEMBER 31, 1997 3
<PAGE>
PERFORMANCE (%)(1)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q Since
1997 1997 3 yrs. Inception(2)
<S> <C> <C> <C> <C>
SPECIAL EQUITIES II (3.40) 26.21 24.56 16.32
RUSSELL 2000 (3.35) 22.36 22.33 15.74
</TABLE>
SECTOR WEIGHTINGS (as of December 31, 1997)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Autos & Transportation 2.0%
Cash 5.6%
Technology 6.5%
Consumer Discretionary 28.9%
Producer Durables 12.1%
Materials & Processing 7.2%
Consumer Staples 1.6%
Energy 4.9%
Health Care 8.1%
Financial Services 23.1%
</TABLE>
4 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
Calendar Years
- --------------------------------------------------------
1997 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C>
26.2 26.6 21.0 (1.5) 10.1
22.4 16.5 28.4 (1.8) 13.8
</TABLE>
SECTOR PERFORMANCE (as of December 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q 1997 1997
------------------------ -----------------------
SPECIAL RUSSELL SPECIAL RUSSELL
EQUITIES II 2000 EQUITIES II 2000
<S> <C> <C> <C> <C>
AUTOS & TRANSPORTATION 11.6% (3.1%) 48.4% 31.3%
CONSUMER STAPLES 5.8 3.9 (4.5) 40.1
FINANCIAL SERVICES 2.7 5.8 42.1 36.0
MATERIALS & PROCESSING 1.9 (7.3) 3.5 13.1
OTHER 0.0 2.0 0.0 33.2
UTILITIES 0.0 13.7 22.4 35.6
HEALTH CARE (2.4) (7.2) 28.6 10.3
CONSUMER DISCRETIONARY (3.2) (3.3) 33.0 21.4
PRODUCER DURABLES (3.7) (9.4) 25.4 26.3
TECHNOLOGY (18.1) (16.0) 19.3 1.3
ENERGY (22.2) (16.0) 3.9 14.4
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 5
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL
EQUITIES II RUSSELL 2000
<S> <C> <C>
P/E RATIO (MEDIAN) 17.1 21.9
PRICE/BOOK 2.85 2.85
PRICE/SALES 0.99 1.47
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 17.5% 21.4%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $910 million $750 million
PORTFOLIO VALUE $166 million $873 billion
NUMBER OF HOLDINGS 48 1,894
- --------------------------------------------------------------------------------
TICKER SYMBOL: SPEQX
CUSIP #: 830833406
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</TABLE>
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
INTEGRATED HEALTH SERVICES, INC. (IHS)
Integrated Health Services is a leading national provider of health care
services in sub-acute settings. IHS provides an integrated network of facilities
and services to manage patients' recovery from illness. IHS benefits from the
constant pressure of reducing health care costs, as IHS provides care in the
lowest cost setting which HMOs and health insurers find very attractive. IHS
should enjoy strong earnings growth over the next few years due to improved
utilization of existing facilities and synergies from the numerous acquisitions
it has made. Currently, IHS trades at a significant discount to the market, its
peers, and its growth rate.
WORLD COLOR PRESS, INC. (WRC)
World Color Press has rapidly grown to become the third largest diversified
commercial printer in the United States and the industry's leading consolidator,
having successfully integrated 16 acquisitions since 1992. As a result, revenues
have grown from $660 million in 1992 to an estimated $2.0 billion in 1997. Rapid
industry consolidation should continue as customers increasingly demand the
greater economies, larger capacity, and state-of-the-art technologies WRC can
provide. WRC should continue to benefit in the form of additional acquisitions,
leading to strong earnings growth. Despite the bright prospects, WRC trades at a
compelling valuation.
6 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
TOP TEN HOLDINGS(3) % OF NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
BRYLANE INC.
Specialty catalogs 3.3%
UNITED STATIONERS INC.
Office products distributor 3.2%
INTEGRATED HEALTH SERVICES, INC.
Sub-acute health care services 3.0%
CDI CORP.
Temporary personnel/outsourcing 2.8%
CMAC INVESTMENT CORP.
Mortgage insurance 2.8%
TRIGON HEALTHCARE, INC.
Health maintenance organization 2.7%
HUGHES SUPPLY INC.
Construction/industrial supplies 2.6%
FURNITURE BRANDS INTL.
Furniture manufacturer 2.6%
WORLD COLOR PRESS, INC.
Commercial printer 2.6%
PENTAIR, INC.
Diversified manufacturer 2.5%
TOP TEN HOLDINGS 28.1%
</TABLE>
NOTES TO PERFORMANCE
(1) The performance for the one and three years ended December 31, 1997, and
for the period February 9, 1993 (inception) through December 31, 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. The S&P 400 Index includes 400 mid-sized 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 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.
ANNUAL REPORT - DECEMBER 31, 1997 7
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
----------- ------------ ------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 2.0%
OTHER TRANSPORTATION - 2.0%
Gulfstream Aerospace Corp.(a) Jet aircraft 114,800 $ 3,357,900
CONSUMER DISCRETIONARY - 28.9%
APPAREL/TEXTILES - 3.7%
Kellwood Co. Apparel maker 122,600 3,678,000
Tommy Hilfiger Corp.(a) Apparel maker 71,500 2,511,438
------------
6,189,438
COMMERCIAL SERVICES - 9.5%
Bell & Howell Co.(a) Info services/mailing eqpt. 158,500 3,833,718
CDI Corp.(a) Temporary personnel 102,800 4,703,100
Harland (John H.) Co. Check printing 87,800 1,843,800
United Stationers Inc.(a) Office products distributor 111,400 5,361,125
------------
15,741,743
CONSUMER PRODUCTS/SERVICES - 5.7%
Furniture Brands Intl.(a) Furniture manufacturer 210,800 4,321,400
Harman Intl. Industries, Inc. Audio equipment 41,300 1,752,668
Libbey Inc. Glass tableware 87,700 3,321,638
------------
9,395,706
PRINTING/PUBLISHING - 2.6%
World Color Press, Inc.(a) Commercial printer 161,500 4,289,844
RETAIL - 7.4%
Brylane Inc.(a) Specialty catalogs 110,400 5,437,200
Fingerhut Companies, Inc. Catalog retailer 186,900 3,994,987
Zale Corp.(a) Jewelry retailer 125,000 2,875,000
------------
12,307,187
------------
TOTAL CONSUMER DISCRETIONARY 47,923,918
CONSUMER STAPLES - 1.6%
International Multifoods Corp. Foodservice distribution 91,300 2,584,931
ENERGY - 4.9%
EXPLORATION & PRODUCTION - 4.9%
Forcenergy Inc.(a) Oil & gas producer 112,100 2,935,618
Newfield Exploration Co.(a) Oil & gas producer 16,800 391,650
Santa Fe Energy Resources(a) Oil & gas producer 185,000 2,081,250
Swift Energy Co.(a) Oil & gas producer 127,400 2,683,363
------------
TOTAL ENERGY 8,091,881
</TABLE>
8 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
----------- ------------ ------------
<S> <C> <C> <C>
FINANCIAL SERVICES - 23.1%
BANKS/THRIFTS - 1.9%
Peoples Heritage Financial
Group Maine-based thrift 68,700 $ 3,160,200
INSURANCE - 12.7%
American Heritage Life
Investment Life insurance firm 80,800 2,908,800
CMAC Investment Corp. Mortgage insurance 75,700 4,570,387
Enhance Financial
Services Grp Inc. Specialty reinsurance 68,200 4,057,900
Fremont General Corp. Workers' comp. insurance 71,600 3,920,100
Highlands Insurance
Group, Inc.(a) P & C insurance 86,600 2,457,275
Horace Mann Educators Corp. P & C insurance 107,200 3,048,500
------------
20,962,962
OTHER FINANCIAL SERVICES - 3.1%
Advanta Corp. Consumer finance 61,900 1,570,713
FIRSTPLUS Financial
Group, Inc.(a) Consumer finance firm 93,800 3,599,575
------------
5,170,288
REAL ESTATE INVESTMENT TRUSTS - 5.4%
American General
Hospitality Corp. Hotel properties REIT 120,700 3,228,725
Parkway Properties, Inc. Office buildings REIT 73,000 2,504,813
Prentiss Properties Trust Office/industrial REIT 118,300 3,305,006
------------
9,038,544
TOTAL FINANCIAL SERVICES 38,331,994
HEALTH CARE - 8.1%
HEALTH CARE SERVICES - 6.9%
Integrated Health Services, Inc. Sub-acute health care srvcs. 157,500 4,912,031
Sierra Health Services, Inc.(a) Health maintenance organ. 57,800 1,943,525
Trigon Healthcare, Inc.(a) Health maintenance organ. 173,400 4,530,075
------------
11,385,631
MEDICAL EQUIPMENT/PRODUCTS - 1.2%
Marquette Medical
Systems, Inc.(a) Monitoring equipment 74,900 1,994,213
------------
TOTAL HEALTH CARE 13,379,844
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 9
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997 (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
----------- ------------ ------------
<S> <C> <C> <C>
MATERIALS & PROCESSING - 7.2%
BUILDING/CONSTRUCTION PRODUCTS - 2.6%
Hughes Supply Inc. Construction/indust. supplies 124,150 $ 4,337,491
SPECIALTY CHEMICALS - 2.2%
International Specialty
Products Inc.(a) Fine chemicals 248,600 3,713,462
STEEL/IRON - 2.4%
UCAR International Inc.(a) Steelmaking materials 99,500 3,973,781
------------
TOTAL MATERIALS & PROCESSING 12,024,734
PRODUCER DURABLES - 12.1%
MACHINERY - 3.8%
AGCO Corp. Agriculture eqpt. producer 83,600 2,445,300
Cincinnati Milacron Inc. Cutting & machine tools 147,800 3,833,563
------------
6,278,863
OTHER PRODUCER DURABLES - 8.3%
General Cable Corp. Wire & cable producer 95,300 3,448,669
MagneTek, Inc.(a) Integrated electrical prods. 165,500 3,227,250
Pentair, Inc. Diversified manufacturer 113,300 4,071,719
TriMas Corp. Diversified manufacturer 86,200 2,963,125
------------
13,710,763
------------
TOTAL PRODUCER DURABLES 19,989,626
TECHNOLOGY - 6.5%
Coherent, Inc.(a) Laser manufacturer 111,700 3,923,463
Computer Products, Inc.(a) Power supplies 29,800 674,224
Galileo International, Inc.(a) Airline reservation system 106,500 2,942,063
Zebra Technologies Corp.(a) Bar coding equipment 106,800 3,177,300
------------
TOTAL TECHNOLOGY 10,717,050
------------
TOTAL COMMON STOCKS - 94.4%
(Cost: $136,070,248) 156,401,878
</TABLE>
10 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Market
Value
------------
<S> <C>
MONEY MARKET INSTRUMENTS(b)
Yield 5.33% to 5.64%
due January 1998 to September 1998
American Family Financial Services $ 205,048
General Mills, Inc. 1,208,644
Johnson Controls, Inc. 4,689,499
Pitney Bowes Credit Corp. 1,030,000
Warner Lambert Corp. 2,310,287
Wisconsin Electric Power Corp. 1,431,609
------------
TOTAL MONEY MARKET INSTRUMENTS - 6.6%
(Cost: $10,875,087) 10,875,087
------------
TOTAL INVESTMENTS - 101.0%
(Cost: $146,945,335) 167,276,965
OTHER LIABILITIES LESS ASSETS - (1.0%) (1,590,193)
------------
NET ASSETS - 100.0% $165,686,772
------------
------------
</TABLE>
(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, 1997.
Based on cost of investments for federal income tax purposes of $146,945,335 on
December 31, 1997, net unrealized appreciation was $20,331,630, consisting of
gross unrealized appreciation of $25,431,322 and gross unrealized depreciation
of $5,099,692.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 11
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $146,945,335) $167,276,965
Receivable for:
Dividends and interest $ 200,408
Shares sold 395,961 596,369
------------
Organization costs, net of accumulated
amortization of $17,089 5,152
------------
Total assets 167,878,486
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 1,815,540
Shares redeemed 155,825
Comprehensive management fee 207,061
Trustees' fees 1,338
Organization costs 11,950 2,191,714
------------ ------------
Net assets applicable to shares
outstanding $165,686,772
------------
------------
Shares outstanding--no par value
(unlimited number of shares authorized) 12,998,304
------------
------------
PRICING OF SHARES
Net asset value, offering price, and
redemption price per share $ 12.75
------------
------------
ANALYSIS OF NET ASSETS
Paid-in capital $144,120,733
Undistributed net realized gain on
sales of investments 1,234,409
Unrealized appreciation of investments 20,331,630
Net assets applicable to shares outstanding $165,686,772
------------
------------
</TABLE>
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
STATEMENT OF OPERATIONS Year Ended December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 1,105,769
Interest 516,124
------------
Total investment income 1,621,893
Expenses:
Comprehensive management fee 1,995,055
Fees to unaffiliated trustees 18,198
Amortization of organization costs 2,712
------------
Total expenses 2,015,965
------------
Net investment loss (394,072)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 22,856,580
Net change in unrealized appreciation 7,533,967
------------
Net realized and unrealized gain on investments 30,390,547
------------
Net increase in net assets resulting from operations $ 29,996,475
------------
------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/97 12/31/96
------------ ------------
<S> <C> <C>
From operations:
Net investment loss $ (394,072) $ (235,416)
Net realized gain on sales of investments 22,856,580 20,381,999
Net change in unrealized appreciation 7,533,967 2,418,395
------------ ------------
Net increase in net assets resulting
from operations 29,996,475 22,564,978
Distributions to shareholders from:
Net investment income -- (34,255)
Net realized gains (25,152,661) (16,359,084)
------------ ------------
Total distributions (25,152,661) (16,393,339)
From share transactions:
Proceeds from shares sold 124,093,499 20,849,640
Reinvestments of dividends
and capital gain distributions 24,674,327 16,109,334
Payments for shares redeemed (93,257,451) (27,001,291)
------------ ------------
Net increase in net assets
resulting from share transactions 55,510,375 9,957,683
------------ ------------
Total increase in net assets 60,354,189 16,129,322
Net assets at beginning of year 105,332,583 89,203,261
Net assets at end of year $165,686,772 $105,332,583
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
14 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year Year Year For the Period
Ended Ended Ended Ended 2/9/93(a)-
12/31/97 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 (0.03) (0.02) 0.06 0.02 0.01
Net realized and unrealized
gain (loss) on investments 3.13 2.94 2.06 (0.19) 1.00
Total from Investment Operations 3.10 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 (2.29) (2.26) (0.91) (0.46) (0.22)
-------- -------- -------- -------- --------
Total Distributions (2.29) (2.27) (0.97) (0.48) (0.22)
-------- -------- -------- -------- --------
Net asset value at end of period $ 12.75 $ 11.94 $ 11.29 $ 10.14 $ 10.79
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return 26.21% 26.60% 20.95% (1.52%) 10.08%(b)
Ratios/Supplemental Data
Ratio of expenses to average net assets 1.51% 1.53% 1.52% 1.51% 1.51%(c)
Ratio of net investment (loss) income
to average net assets (0.30%) (0.24%) 0.50% 0.22% (0.10%)(c)
Portfolio turnover rate 104% 145% 102% 82% 111%(c)
Net assets, end of period (in thousands) $165,687 $105,333 $ 89,203 $ 99,638 $ 58,608
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Average commission rate paid on stock transactions for the years ended
December 31, 1997 and December 31, 1996, was $0.0601 and $0.0619 per share,
respectively.
Effective August 31, 1995, the Fund's Investment Adviser changed from Mesirow
Asset Management, Inc., to Skyline Asset Management, L.P.
(a) Commencement of operations.
(b) For the period February 9, 1993 to December 31, 1993.
(c) Ratios have been determined on an annualized basis.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Skyline Funds is an open-ended, diversified investment management company which
consists of the Special Equities Portfolio, Special Equities II, and Small Cap
Contrarian. The Funds commenced public offering of their shares as follows:
Special Equities Portfolio on April 23, 1987, Special Equities II on February 9,
1993, and Small Cap Contrarian on December 15, 1997. 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 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. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline 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 Skyline Funds expenses, such as trustees' fees, are allocated among
the three Skyline Funds.
- - RECLASSIFICATION - The 1997 net investment loss of $394,072 has been offset
against undistributed net realized gain at December 31, 1997.
16 ANNUAL REPORT - DECEMBER 31, 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 comprehensive management
fee paid for the year ended December 31, 1997 was $1,995,055.
Certain officers and trustees of the Skyline Funds are also officers, limited
partners or shareholders of limited partners of the Adviser. The Fund makes no
direct payments to the officers or trustees who are affiliated with the Adviser.
For the year ended December 31, 1997, fees of $18,198 were paid by the Fund to
the unaffiliated trustees.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
12/31/97 12/31/96
--------------------------------
<S> <C> <C>
Shares sold 9,132,124 1,685,216
Shares issued
in reinvestment of dividends 1,959,834 1,398,376
------------ ------------
11,091,958 3,083,592
Less shares redeemed (6,913,355) (2,164,214)
------------ ------------
Net increase in shares outstanding 4,178,603 919,378
------------ ------------
------------ ------------
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1997 are as follows:
Cost of purchases $ 155,464,536
Proceeds from sales 128,929,303
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders of Skyline Special Equities II
and the Board of Trustees of Skyline Funds
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Special Equities II as of December 31,
1997, 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, 1997 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, 1997, 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 16, 1998
18 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FEDERAL TAX STATUS OF 1997 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, 1997
- --------------------------------------------------------------------------------
This report, including the audited 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.
ANNUAL REPORT - DECEMBER 31, 1997 19
<PAGE>
This page left blank intentionally.
20 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
[LOGO]
Q4
SKYLINE SMALL CAP CONTRARIAN
INVESTING IN SMALL-SIZED COMPANIES
STRATEGY
- - Focus on solid companies that have fallen deeply out-of-favor
- - Value orientation - low price/book or price/sales ratios
- - No derivatives, shorting, hedging or currency plays
- - Market cap range of $50 million to $2 billion
DECEMBER 31, 1997
<PAGE>
LETTER FROM DAREN C. HEITMAN, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
January 31, 1998
Dear Shareholder:
In this inaugural letter for Skyline Small Cap Contrarian, the first order of
business is to thank all of you who showed confidence in our firm and its newest
product by investing.
My family's investment is right there with yours because I believe in the
strategy --buying the shares of good companies experiencing short-term problems.
Investors become very emotional about companies and stocks that are not
performing well, resulting in extremely low valuations regardless of the
long-term outlook. We seek to exploit these opportunities and wait for the
company to report better results; if the results come through as we expect, the
share price gains can be terrific.
The Fund began operations on December 15, 1997. With an ending share price equal
to its initial share price of $10.00, the Fund's performance through its first
two weeks was pretty uneventful. The Fund ended the year with 36 stocks and just
over 10% of its assets in cash. Our goal is to increase the total number of
holdings to 50 and get the cash down to about 5% of assets by the end of the
first quarter.
The Fund at year-end was well diversified among several industries, but a few
points are worth noting. First, you might have noticed the large technology
weighting. This is because there are currently many good technology companies
selling at very depressed prices. This situation resulted from the news out of
Asia of rapidly declining currencies, which rightfully spooked many technology
investors, as well as normal cyclical downturns in some specific sectors, such
as computer disk drives. Longer term, I expect there to always be opportunities
to buy technology companies at great prices. This sector is especially
vulnerable to the overselling that accompanies poor financial performance
because of the perceived risk of the stocks and the investment style of most
technology investors. However, many of these companies have very diverse product
lines, long product life cycles, and strong balance sheets. These strengths
provide the contrarian investor with the opportunity to buy healthy, growing
companies with attractive return on capital measures at terrific prices. With
time, we believe these companies can generate much higher valuations when their
financial results improve.
On the other hand, the financial sector is substantially underweighted. This
underweighting is not the result of some macro forecast for interest rates or
any strong distaste for financial companies. It resulted simply because most
sectors of the financial industry have performed quite well for several years,
and the stocks do not fit the profile we are seeking. Also worth noting is that
the Fund is not laden with deeply cyclical companies, such as steel or paper.
While there will always be economically sensitive companies in the Fund, I would
like it to be dominated by companies with what we believe are attractive
long-term growth opportunities.
ANNUAL REPORT - DECEMBER 31, 1997 1
<PAGE>
The biggest disadvantage of managing a contrarian fund is the absolute certainty
of occasionally looking foolish. When a portfolio manager purchases the stock of
a popular company and the stock declines, everyone asks, "What's wrong with that
company's management team? They couldn't deliver what they promised."
In contrast, when a portfolio manager purchases the stock of a company having
problems and the stock declines, people ask, "What's wrong with that portfolio
manager? It was obvious that stock wasn't going to perform well." My request
to you is to keep this in mind when you look at the performance of individual
stocks in the Fund. If you cannot find something to dislike about some of these
companies, they probably do not belong in a contrarian fund.
With a median price/book value ratio of just over 1.1, our portfolio of stocks
is one of the cheapest available to fund investors. Yet we believe that all of
these companies have the potential to sustain earnings at much higher levels. I
am excited about the potential of this Fund and hope to reward richly those who
showed early confidence in us and this investment style.
/s/ Daren Heitman
2 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q Since
1997 Inception(2)
<S> <C> <C>
SMALL CAP CONTRARIAN 0.00 0.00
RUSSELL 2000 3.91 3.91
S&P 500 0.80 0.80
</TABLE>
SECTOR WEIGHTINGS (as of December 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Other 2.4%
Cash 10.5%
Autos & Transportation 5.9%
Technology 17.2%
Consumer Discretionary 19.3%
Producer Durables 12.7%
Consumer Staples 2.1%
Materials & Processing 4.5%
Energy 4.9%
Health Care 13.1%
Financial Services 7.4%
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 3
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
CONTRARIAN RUSSELL 2000 S&P 500
<S> <C> <C> <C>
PRICE/BOOK 1.19 2.85 4.11
PRICE/SALES 0.75 1.47 1.77
P/E RATIO (MEDIAN) 28.5 21.9 21.6
- -------------------------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 0.20% 21.4% 12.6%
YEAR AVERAGE
- -------------------------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $140 million $750 million $34 billion
PORTFOLIO VALUE $4.8 million $873 billion $7,536 billion
NUMBER OF HOLDINGS 36 1,894 500
- -------------------------------------------------------------------------------------------------
CUSIP #: 830833604
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</TABLE>
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
INSURANCE AUTO AUCTIONS, INC. (IAAI)
Insurance Auto Auctions provides insurance companies with an outlet for selling
totaled vehicles by holding periodic auctions for salvage buyers. Over the past
few years, the company suffered under multi-year contracts that did not provide
the firm with an adequate profit per vehicle processed. These contracts have
nearly run their course, and Insurance Auto's new management is incorporating an
attractive, fixed-fee margin into the new contracts. Despite an apparently
imminent recovery in earnings, the shares are trading below stated book value.
Our estimate for potential earnings per share is $1.50, including roughly $0.30
per share in non-cash goodwill amortization.
KOMAG, INCORPORATED (KMAG)
Komag manufactures the disks that store data in computer disk drives, a market
expected to grow rapidly over the long term. As the technology leader, Komag has
historically sold its products to the high-end disk drive market, which is
currently suffering through a downturn. As a result, Komag's capacity is
underutilized and profits are suffering. However, management is very strong, and
the company has a long record of success in this market. At the current price,
the stock is selling at 1.2x book value and a very low multiple of our estimate
of potential earnings of $2.50 or more per share.
4 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS(3) % OF NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
CREDIT ACCEPTANCE CORP.
Automobile finance services 4.3%
QUEST DIAGNOSTICS INC.
Diagnostic testing services 3.8%
BINKS-SAMES CORP.
Spray coating equipment 3.8%
INSURANCE AUTO AUCTIONS, INC.
Auto salvage 3.8%
KOMAG, INC.
Computer components 3.5%
CLINTRIALS RESEARCH INC.
Contract research firm 3.4%
BROWN & SHARPE MANUFACTURING
Metrology instruments 3.0%
TRIGON HEALTHCARE, INC.
Health maintenance organization 3.0%
ELSAG BAILEY PROCESS AUTOMATION N.V.
Process control systems 3.0%
SENSORMATIC ELECTRONICS CORP.
Anti-theft devices 2.9%
TOP TEN HOLDINGS 34.5%
</TABLE>
NOTES TO PERFORMANCE
(1) The performance for the period December 15, 1997 (inception) through
December 31, 1997, is a total return calculation (not annualized) 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.
Source: Frank Russell Company.
(2) Return is calculated from the Fund's inception on December 15, 1997.
(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.
ANNUAL REPORT - DECEMBER 31, 1997 5
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 5.9%
AUTO RELATED - 1.9%
APS Holding Corp.(a) Aftermarket auto parts dist. 36,500 $ 91,250
OTHER TRANSPORTATION - 2.1%
Mesa Air Group, Inc.(a) Regional airline 20,200 99,738
RAILROAD - 1.9%
RailTex, Inc.(a) Freight services 6,400 91,600
---------
TOTAL AUTOS & TRANSPORTATION 282,588
CONSUMER DISCRETIONARY - 19.3%
COMMERCIAL SERVICES - 5.4%
Insurance Auto Auctions, Inc.(a) Auto salvage 15,500 178,250
Right Management
Consultants, Inc.(a) Outplacement & HR services 6,300 80,325
---------
258,575
CONSUMER PRODUCTS/SERVICES - 9.2%
American Residential
Services, Inc.(a) HVAC repair services 7,800 121,875
Drypers Corp.(a) Makes disposable diapers 11,600 68,150
Global Motorsport Group, Inc.(a) Motorcycle accessories 11,200 130,200
LADD Furniture, Inc.(a) Furniture manufacturer 7,800 117,000
---------
437,225
RETAIL - 4.7%
Discount Auto Parts, Inc.(a) Auto parts stores 4,800 91,800
Lechters, Inc.(a) Housewares chain 25,500 129,094
---------
220,894
---------
TOTAL CONSUMER DISCRETIONARY 916,694
CONSUMER STAPLES - 2.1%
ProSource, Inc.(a) Foodservice distribution 13,100 98,250
ENERGY - 4.9%
EXPLORATION & PRODUCTION - 2.0%
Comstock Resources, Inc.(a) Oil & gas producer 8,200 97,888
OTHER ENERGY - 2.9%
Willbros Group Inc.(a) Engineering/construction firm 9,100 136,500
---------
TOTAL ENERGY 234,388
6 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
- ---------------------------------------------------------------------------------------
<CAPTION>
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
FINANCIAL SERVICES - 7.4%
INSURANCE - 1.6%
Highlands Insurance
Group, Inc.(a) P & C insurance 2,000 $ 56,750
Navigators Group, Inc. (The) P & C insurance 1,200 22,275
---------
79,025
OTHER FINANCIAL SERVICES - 5.8%
Advanta Corp. Consumer finance 2,800 71,050
Credit Acceptance Corp.(a) Automobile finance services 26,300 203,825
---------
274,875
---------
TOTAL FINANCIAL SERVICES 353,900
HEALTH CARE - 13.1%
HEALTH CARE SERVICES - 10.2%
ClinTrials Research Inc.(a) Contract research firm 20,800 163,800
Quest Diagnostics Inc.(a) Diagnostic testing services 10,800 182,250
Trigon Healthcare, Inc.(a) Health maintenance organ. 5,400 141,075
---------
487,125
MEDICAL EQUIPMENT/PRODUCTS - 2.9%
Allied Healthcare
Products, Inc.(a) Makes respiratory products 17,500 135,625
---------
TOTAL HEALTH CARE 622,750
MATERIALS & PROCESSING - 4.5%
METAL FABRICATIONS - 2.5%
Atchison Casting Corp.(a) Steel & iron castings 7,300 118,625
STEEL/IRON - 2.0%
Birmingham Steel Corp.(a) Steel mini-mill 5,900 92,925
---------
TOTAL MATERIALS & PROCESSING 211,550
PRODUCER DURABLES - 12.7%
MACHINERY - 6.8%
Binks-Sames Corp. Spray coating equipment 4,300 181,675
Brown & Sharpe Manufacturing(a) Metrology instruments 13,900 141,606
---------
323,281
ANNUAL REPORT - DECEMBER 31, 1997 7
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997 (continued)
- --------------------------------------------------------------------------------
<CAPTION>
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
OTHER PRODUCER DURABLES - 5.9%
Elsag Bailey Process
Automation N.V.(a) Process control systems 8,500 $ 140,250
Sensormatic Electronics Corp. Anti-theft devices 8,500 139,719
---------
279,969
---------
TOTAL PRODUCER DURABLES 603,250
TECHNOLOGY - 17.2%
GENICOM Corp.(a) Computer support services 8,200 94,300
Imation Corp.(a) Data storage products 8,500 136,000
Komag, Inc.(a) Computer components 11,200 166,600
MEMC Electronic
Materials, Inc.(a) Produces silicon wafers 6,000 91,500
PSC Inc.(a) Bar coding equipment 7,200 94,950
Smartflex Systems, Inc.(a) Flexible circuit assembler 12,000 114,000
Unit Instruments, Inc.(a) Gas flow controllers 12,500 117,969
---------
TOTAL TECHNOLOGY 815,319
OTHER - 2.4%
SPACEHAB, Inc.(a) Lab & supply modules 10,900 115,130
---------
TOTAL COMMON STOCKS - 89.5%
(Cost: $4,242,649) 4,253,819
8 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
- ---------------------------------------------------------------------------------------
<CAPTION>
Market
Value
-----------
<S> <C>
MONEY MARKET INSTRUMENTS(b)
Yield 5.33% to 5.64%
due January 1998 to September 1998
American Family Financial Services $ 174,970
General Mills, Inc. 165,000
Johnson Controls, Inc. 180,744
Pitney Bowes Credit Corp. 165,000
Sara Lee Corp. 165,000
Warner Lambert Corp. 211,414
Wisconsin Electric Power Corp. 212,000
---------
TOTAL MONEY MARKET INSTRUMENTS - 26.8%
(Cost: $1,274,128) 1,274,128
---------
TOTAL INVESTMENTS - 116.3%
(Cost: $5,516,777) 5,527,947
OTHER LIABILITIES LESS ASSETS - (16.3%) (775,430)
---------
NET ASSETS - 100.0% $ 4,752,517
-----------
-----------
</TABLE>
(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, 1997.
Based on cost of investments for federal income tax purposes of $5,516,777 on
December 31, 1997, net unrealized appreciation was $11,170, consisting of gross
unrealized appreciation of $94,423 and gross unrealized depreciation of $83,253.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 9
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $5,516,777) $ 5,527,947
Receivable for:
Interest $ 3,655
Shares sold 69,201 72,856
----------
Organization costs, net of accumulated
amortization of $438 46,842
----------
Total assets 5,647,645
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 845,087
Comprehensive management fee 2,761
Organization costs 47,280 895,128
---------- ----------
Net assets applicable to shares
outstanding $ 4,752,517
-----------
-----------
Shares outstanding--no par value
(unlimited number of shares authorized) 475,038
-----------
-----------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 10.00
-----------
-----------
ANALYSIS OF NET ASSETS
Paid-in capital $ 4,741,347
Unrealized appreciation of investments 11,170
-----------
Net assets applicable to shares outstanding $ 4,752,517
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
10 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
STATEMENT OF OPERATIONS For the Period December 15, 1997(a) to December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Interest income $ 2,652
Expenses:
Comprehensive management fee 2,758
Amortization of organization costs 438
---------
Total expenses 3,196
---------
Net investment loss (544)
Net change in unrealized appreciation 11,170
---------
Net increase in net assets resulting from operations $ 10,626
---------
---------
</TABLE>
(a) Commencement of operations.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 11
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
12/15/97(a)-12/31/97
--------------------
<S> <C>
From operations:
Net investment loss $ (544)
Net change in unrealized appreciation 11,170
-----------
Net increase in net assets resulting from operations 10,626
From share transactions:
Proceeds from shares sold 4,743,861
Payments for shares redeemed (1,970)
-----------
Net increase in net assets resulting from share transactions 4,741,891
-----------
Total increase in net assets 4,752,517
Net assets at beginning of period 0
-----------
Net assets at end of period $ 4,752,517
-----------
-----------
</TABLE>
(a) Commencement of operations.
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
12/15/97(a)-
12/31/97
---------------
<S> <C>
Net asset value at beginning of period $ 10.00
-------
Income from investment operations
Net investment loss 0.00
Net realized and unrealized gain on investments 0.00
-------
Total from investment operations 0.00
-------
Net asset value at end of period $ 10.00
-------
-------
Total Return 0.00%(b)
Ratios/Supplemental Data
Ratio of expenses to average net assets 1.71%(c)
Ratio of net investment loss to average net assets (0.29%)(c)
Portfolio turnover rate 0%(c)
Net assets, end of period (in thousands) $ 4,753
-------
-------
</TABLE>
Average commission rate paid on stock transactions for the period December 15,
1997 to December 31, 1997 was $0.0514 per share.
(a) Commencement of operations.
(b) For the period December 15, 1997 to December 31, 1997.
(c) Ratios have been determined on an annualized basis.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Skyline Funds is an open-ended, diversified investment management company which
consists of Special Equities Portfolio, Special Equities II, and Small Cap
Contrarian. The Funds commenced public offering of their shares as follows:
Special Equities Portfolio on April 23, 1987, Special Equities II on February 9,
1993, and Small Cap Contrarian on December 15, 1997. The following notes relate
solely to the accompanying financial statements of Small Cap Contrarian
("Fund").
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. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of a market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline 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 Skyline Funds expenses, such as trustees' fees, are allocated among
the three Skyline Funds.
- - RECLASSIFICATION - The 1997 net investment loss of $544 has been offset
against paid-in capital at December 31, 1997.
14 ANNUAL REPORT - DECEMBER 31, 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 comprehensive management
fee paid for the period December 15, 1997 to December 31, 1997 was $2,785. 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 Skyline Funds are also officers, limited
partners or shareholders of limited partners of the Adviser. The Fund makes no
direct payments to the officers or trustees who are affiliated with the Adviser.
For the period December 15, 1997 to December 31, 1997, no fees were paid by the
Fund to the unaffiliated trustees.
In connection with the organization of the Fund, organizational costs of $47,280
was advanced to the Fund by the Adviser. This expense is being amortized on a
straight line basis through December 15, 2002. The Fund will reimburse the
Adviser for such expenses in equal installments without interest over 20
calendar quarters.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
For the Period
12/15/97 to 12/31/97
--------------------
<S> <C>
Shares sold 475,238
Less shares redeemed (200)
-----------------
Net increase in shares outstanding 475,038
-----------------
-----------------
</TABLE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the period
December 15, 1997 to December 31, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost of purchases $4,242,649
Proceeds from sales 0
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders of Skyline Small Cap Contrarian
and the Board of Trustees of Skyline Funds
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Small Cap Contrarian as of December 31,
1997, the related statements of operations and changes in net assets, and the
financial highlights for the period December 15, 1997 (commencement of
operations) to December 31, 1997. 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 audit.
We conducted our audit 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, 1997 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 audit provides 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 Small Cap Contrarian at December 31, 1997 and the results of its
operations, the changes in its net assets, and the financial highlights for the
period December 15, 1997 to December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 16, 1998
16 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
REPORT FOR THE PERIOD ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
This report, including the audited 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.
ANNUAL REPORT - DECEMBER 31, 1997 17
<PAGE>
This page left blank intentionally.
18 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
This page left blank intentionally.
ANNUAL REPORT - DECEMBER 31, 1997 19
<PAGE>
This page left blank intentionally.
20 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
For 24-hour Skyline Funds prices CALL: 1.800.828.2SKY
(1.800.828.2759)
To speak with a Skyline Funds Representative
during normal business hours CALL: 1.800.458.5222
- --------------------------------------------------------------------------------
[LOGO]
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial Statements:
SKYLINE SPECIAL EQUITIES PORTFOLIO
Part A: None.
Part B: The following financial statements, but no other part of the
report, are incorporated by reference to the following portions of
Registrant's 1997 Skyline Special Equities Portfolio Annual Report:
- Report of Independent Auditors
- Statement of Assets and Liabilities at December 31, 1997
- Statement of Operations for the year ended December 31, 1997
- Statement of Changes in Net Assets for the years ended
December 31, 1997 and 1996
- Portfolio Holdings at December 31, 1997
- Notes to Financial Statements
NOTE: the following schedules have been omitted for the following
reasons:
Schedule I - The required information is presented in the Portfolio
Holdings at December 31, 1997.
Schedules II, III, IV and V - The required information is not present.
SKYLINE SMALL CAP VALUE PLUS
Part A: None.
Part B: The following financial statements, but no other part of the
report, are incorporated by reference to the following portions of
Registrant's 1997 Skyline Small Cap Value Plus (then named Skyline
Special Equities II) Annual Report:
- Report of Independent Auditors
- Statement of Assets and Liabilities at December 31, 1997
C-1
<PAGE>
- Statement of Operations for the year ended December 31, 1997
- Statement of Changes in Net Assets for the years ended
December 31, 1997 and 1996
- Portfolio Holdings at December 31, 1997
- Notes to Financial Statements
NOTE: the following schedules have been omitted for the following
reasons:
Schedule I - The required information is presented in the Portfolio
Holdings at December 31, 1997.
Schedules II, III, IV and V - The required information is not present.
SKYLINE SMALL CAP CONTRARIAN
Part A: None.
Part B: The following financial statements, but not other part of the
report, are incorporated by reference to the following portions of
Registrant's 1997 Skyline Small Cap Contrarian Annual Report:
- Report of Independent Auditors
- Statement of Assets and Liabilities at December 31, 1997
- Statement of Operations for the year ended December 31, 1997
- Statement of Changes in Net Assets for the period from
December 15, 1997 through December 31, 1997
- Portfolio Holdings at December 31, 1997
- Notes to Financial Statements
NOTE: the following schedules have been omitted for the following
reasons:
Schedule I - The required information is presented in the Portfolio
Holdings at December 31, 1997.
Schedules II, III, IV, and V - 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, "Post-effective
Amendment no. 21"
C-2
<PAGE>
refers to post-effective amendment no. 21 to the Registration
Statement that was filed on April 29, 1996, "Post-effective
Amendment no. 22" refers to post-effective amendment no. 22 to the
Registration Statement that was filed on April 25, 1997, "Post-
effective Amendment no. 23" refers to post-effective amendment no.
23 to the Registration Statement that was filed on August 29, 1997,
and "Post-effective Amendment no. 24" refers to post-effective
amendment no. 24 to the Registration Statement that was filed on
February 27, 1998.
1.1 Agreement and Declaration of Trust of the Registrant
(incorporated by reference to exhibit 1 to Post-effective
Amendment no. 21)
1.2 Amendment No. 1 to Agreement and Declaration of Trust
(incorporated by reference to exhibit 1.2 to Post-effective
Amendment no. 22)
2 By-Laws of the Registrant (incorporated by reference to
exhibit 2 to Post-effective Amendment no. 21)
3 None
4.1 Share certificate for series designated Skyline Special
Equities Portfolio (incorporated by reference to exhibit 4.1
to Post-effective Amendment no. 24)
4.2 Share certificate for series designated Skyline Small Cap
Value Plus (incorporated by reference to exhibit 4.2 to
Post-effective Amendment no. 24)
4.3 Share certificate for series designated Skyline Small Cap
Contrarian (incorporated by reference to exhibit 4.3 to
Post-effective Amendment no. 24)
5.1 Investment Advisory Agreement between the Registrant and
Skyline Asset Management, L.P., relating to Skyline Special
Equities Portfolio (incorporated by reference to 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 Small
Cap Value Plus (incorporated by reference to exhibit 5.2 to
Post-effective Amendment no. 21)
5.3 Investment Advisory Agreement between the Registrant and
Skyline Asset Management, L.P., relating to Skyline Small
Cap Contrarian (incorporated by reference to exhibit 5.3 to
Post-effective Amendment no. 24)
C-3
<PAGE>
6.1 Distribution Agreement between the Registrant and Funds
Distributor, Inc. (incorporated by reference to exhibit 6 to
Post-effective Amendment no. 21)
6.2 Amendment to Distribution Agreement between the Registrant
and Funds Distributor, Inc. (incorporated by reference to
exhibit 6.2 to Post-effective Amendment no. 24)
7 None
8 Amended and Restated Custodian Agreement among the
Registrant, Skyline Asset Management, L.P., and Firstar
Trust Company
9.1 Amended and Restated Transfer Agent Agreement among the
Registrant, Skyline Asset Management, L.P., and Firstar
Trust Company
9.2 Amended and Restated Fund Accounting Services Agreement
among the Registrant, Skyline Asset Management, L.P., and
Firstar Trust Company
10 Opinion and Consent of Counsel relating to Skyline Special
Equities Portfolio, Skyline Small Cap Value Plus, and
Skyline Small Cap Contrarian
11 Consent of Independent Auditors
12 None
13 Investment representation letter of initial purchaser of
shares of beneficial interest of the Registrant
(incorporated by reference to exhibit 13 to Post-effective
Amendment no. 21)
14.1 Skyline Funds Individual Retirement Account Custodial
Agreement and Disclosure Statement and related applications
C-4
<PAGE>
14.2 Skyline Funds SIMPLE-IRA Supplement and related applications
(incorporated by reference to exhibit 14.2 to Post-effective
Amendment no. 23)
15 None
16 Schedule for Computation of Performance Quotations
(incorporated by reference to exhibit 16 to Post-effective
Amendment no. 21)
18 None
19 Skyline Funds Account Application
27.1 Financial Data Schedule -- Skyline Special Equities
Portfolio
27.2 Financial Data Schedule -- Skyline Small Cap Value Plus
27.3 Financial Data Schedule -- Skyline Small Cap Contrarian
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.
<TABLE>
<CAPTION>
Number of Record Holders
Title of Series as of February 18, 1998
--------------- ------------------------
<S> <C>
Skyline Special Equities Portfolio 6,274
Skyline Small Cap Value Plus 5,686
Skyline Small Cap Contrarian 464
</TABLE>
ITEM 27. Indemnification.
Article Tenth of Registrant's Agreement and Declaration of Trust
(exhibit 1 to this registration statement, which is incorporated herein by
reference) provides that registrant shall provide certain indemnification of
its trustees and officers. In accordance with Section 17(h) of the
Investment Company Act, that provision shall not protect any person against
any liability to the registrant or its shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, negligence
or reckless disregard of the duties involved in the conduct of his office.
C-5
<PAGE>
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.
The registrant, its trustees and officers, Skyline Asset
Management, L.P. (the "Adviser") (the investment adviser to registrant) and
certain affiliated persons of the Adviser and affiliated persons of such
persons are insured under a policy of insurance maintained by registrant, the
Adviser and those affiliates, within the limits and subject to the
limitations of the policy, against certain expenses in connection with the
defense of actions, suits or proceedings, and certain liabilities that might
be imposed as a result of such actions, suits or proceedings, to which they
are parties by reason of being or having been such trustees, directors or
officers. The policy expressly excludes coverage for any trustee or officer
whose personal dishonesty, fraudulent breach of trust, lack of good faith, or
intention to deceive or defraud has been finally adjudicated or may be
established or who willfully fails to act prudently.
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
Registrant. 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-6
<PAGE>
ITEM 29. Principal Underwriters.
(a) Funds Distributor, Inc. (the "Distributor") currently acts
as distributor for:
American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc., d/b/a Harris Insight Funds
J.P. Morgan Institutional Funds
J.P. Morgan Funds
The JPM Series Trust
The JPM Series Trust II
LaSalle Partners Funds, Inc.
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
Orbitex Group of Funds
St. Clair Funds, Inc.
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.
C-7
<PAGE>
The Distributor is registered with the Securities and Exchange Commission as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. The Distributor is an indirect wholly-owned subsidiary of Boston
Institutional Group, Inc., a holding company all of whose outstanding shares are
owned by key employees.
(b) The following is a list of the executive officers, directors
and partners of the Distributor:
Director, President and Chief Executive - Marie E. Connolly
Officer
Executive Vice President - George A. Rio
Executive Vice President - Richard W. Ingram
Executive Vice President - Donald R. Roberson
Executive Vice President - William S. Nichols
Senior Vice President - Michael S. Petrucelli
Senior Vice President, General Counsel, - Margaret W. Chambers
Chief Compliance Officer, Secretary and
Clerk
Director, Senior Vice President, - Joseph F. Tower, III
Treasurer and Chief Financial Officer
Senior Vice President - Allen B. Closser
Senior Vice President - Paula R. David
Senior Vice President - Bernard A. Whalen
Director - William J. Nutt
The principal business address of all officers and directors of the Distributor
is 60 State Street, Suite 1300, 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-8
<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) Not applicable.
(b) Registrant undertakes to file a post-effective amendment,
using financial statements of its series Skyline Small Cap Contrarian, within
four to six months from the effective date of the first post-effective amendment
to registrant's registration statement containing a prospectus and statement of
additional information of Small Cap Contrarian.
(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-9
<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
28, 1998.
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.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ William L. Achenbach Trustee )
- ------------------------------ )
William L. Achenbach )
)
)
)
/s/ William M. Dutton Trustee )
- ------------------------------ President )
William M. Dutton (principal executive officer) )
)
)
)
/s/ Paul J. Finnegan Trustee ) April 28, 1998
- ------------------------------ )
Paul J. Finnegan )
)
)
)
/s/ David A. Martin Trustee )
- ------------------------------ )
David A. Martin )
)
)
)
/s/ Richard K. Pearson Trustee )
- ------------------------------ )
Richard K. Pearson )
)
)
)
/s/ Scott C. Blim Secretary and Treasurer )
- ------------------------------ (principal accounting and )
Scott C. Blim financial officer )
</TABLE>
<PAGE>
INDEX OF EXHIBITS FILED WITH THIS AMENDMENT
Exhibit Exhibit
Number -------
------
8 Amended and Restated Custodian Agreement among the
Registrant, Skyline Asset Management, L.P., and
Firstar Trust Company
9.1 Amended and Restated Transfer Agent Agreement
among the Registrant, Skyline Asset Management,
L.P., and Firstar Trust Company
9.2 Amended and Restated Fund Accounting Services
Agreement among the Registrant, Skyline Asset
Management, L.P., and Firstar Trust Company
10 Opinion and Consent of Counsel relating to Skyline
Special Equities Portfolio, Skyline Small Cap Value Plus,
and Skyline Small Cap Contrarian
11 Consent of Independent Auditors
14.1 Skyline Funds Individual Retirement Account Custodial
Agreement and Disclosure Statement and related
Applications
19 Skyline Funds Account Application
27.1 Financial Data Schedule - Skyline Special Equities
Portfolio
27.2 Financial Data Schedule - Skyline Small Cap Value
Plus
27.3 Financial Data Schedule - Skyline Small Cap
Contrarian
<PAGE>
AMENDED AND RESTATED
CUSTODIAN AGREEMENT
THIS AGREEMENT made on August 31, 1995, and amended December 15, 1997
among Skyline Funds, a Massachusetts business trust ("Skyline"), Skyline Asset
Management, L. P., a Delaware limited partnership (the "Manager"), and FIRSTAR
TRUST COMPANY, a corporation organized under the laws of the State of Wisconsin
(hereinafter called "Custodian"),
W I T N E S S E T H :
WHEREAS, Skyline is an open-end management investment company
registered under the Investment Company Act of 1940; and
WHEREAS, Skyline has three series, Skyline Special Equities Portfolio,
Skyline Special Equities II and Skyline Small Cap Contrarian (each a "Fund" and
together, the "Funds");
WHEREAS, Skyline desires that the securities and cash of each Fund
shall be hereafter held and administered by Custodian pursuant to the terms of
this Agreement;
WHEREAS, Skyline and the Manager have entered into investment advisory
agreements pursuant to which the Manager acts as investment adviser to each of
the Funds and has agreed to pay certain ordinary operating expenses of each
Fund, including the fees and expenses payable to the Custodian under this
Agreement; and
NOW, THEREFORE, in consideration of the mutual agreements herein made,
Skyline, the Manager and the Custodian agree as follows:
1. DEFINITIONS
The word "securities" as used herein includes stocks, shares, bonds,
debentures, notes, mortgages or other obligations, and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same, or evidencing or representing any other rights or
interests therein, or in any property or assets.
The words "officers' certificate" shall mean a request or direction or
certification in writing signed in the name of Skyline or a Fund by any two of
the President, a Vice President, the Secretary and the Treasurer of Skyline, or
any other persons duly authorized to sign by the Board of Trustees.
The word "Board" shall mean Board of Trustees of Skyline.
2. Skyline hereby employs Custodian as the custodian of its assets held in
each of the Funds. Skyline agrees to deliver to Custodian all securities and
cash owned by the Funds, and all payments of income, payments of principal or
capital distributions received by the Funds with respect to all securities owned
by the Funds from time to time, and the cash consideration
1
<PAGE>
received by Skyline for such new or treasury shares of beneficial interest in
the Funds as may be issued or sold from time to time.
3. NAMES, TITLES, AND SIGNATURES OF SKYLINE'S OFFICERS
An officer of Skyline will certify to Custodian the names and
signatures of those persons authorized to sign the officers' certificates
described in Section 1 hereof, and the names of the members of the Board of
Trustees, together with any changes which may occur from time to time.
4. RECEIPT AND DISBURSEMENT OF MONEY
A. Custodian shall open and maintain a separate account or accounts
in the name of each Fund, subject only to draft or order by Custodian acting
pursuant to the terms of this Agreement. Custodian shall hold in such account
or accounts, subject to the provisions hereof, all cash received by it from or
for the account of such Fund. Upon receipt of proper instructions, which may by
their terms be continuing instructions when deemed appropriate by the parties,
Custodian shall make payments of cash to, or for the account of a Fund from such
cash only:
(a) for the purchase of securities for the portfolio of that Fund
against the delivery of such securities to Custodian, registered
in the name of the Fund or of the nominee of Custodian referred
to in Section 8 or in proper form for transfer; all securities
accepted by Custodian shall be accompanied by payment of, or a
"due bill" for, any dividends, interest, or other distributions
of the issuer, due the purchaser; (b) in the case of a purchase
effected through a clearing agency or book entry system, in
accordance with the conditions set forth in Section 15 hereof; or
(c) in the case of repurchase agreements entered into between a
Fund and Custodian, or another bank (i) against delivery of the
securities either in certificate form or through an entry
crediting Custodian's account at the Federal Reserve Bank with
such securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by Custodian
along with written evidence of the agreement by Custodian to
repurchase such securities from the Fund.
(b) for the repurchase or redemption of shares of beneficial interest
of a Fund upon delivery thereof to Custodian;
(c) for the payment of interest, dividends, taxes, investment
adviser's fees or fees and expenses of Skyline's non-interested
trustees;
(d) for payments in connection with the conversion, exchange or
surrender of securities owned or subscribed to by a Fund provided
that the consideration therefor to be delivered to Custodian; or
2
<PAGE>
(e) for other proper corporate purposes certified by resolution of
the Board.
Before making any such payment, Custodian shall receive (and may rely
upon) an officers' certificate requesting such payment and stating that it is
for a purpose permitted under the terms of items (a), (b), (c), or (d) of this
Subsection A, and also, in respect of item (e), upon receipt of an officers'
certificate specifying the amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom such payment is to
be made, provided, however, that an officers' certificate need not precede the
disbursement of cash for the purpose of purchasing a money market instrument, or
any other security with same or next-day settlement, if the President, a Vice
President, the Secretary or the Treasurer of Skyline's issues appropriate oral
or facsimile instructions to Custodian and an appropriate officers' certificate
is received by Custodian within two business days thereafter.
B. Custodian shall collect on a timely basis all income and other
payments with respect to registered securities held hereunder to which a Fund
shall be entitled either by law or pursuant to custom in the securities
business, and shall collect on a timely basis all income and other payments. In
furtherance of the foregoing, Custodian is hereby authorized to endorse all
checks, drafts or other orders for the payment of money received by Custodian
for the account of a Fund. Custodian shall collect on a timely basis all income
and other payments with respect to bearer of securities if, on the date of
payment by the issuer, such securities are held by Custodian and shall credit
such income, as collected, to the Fund's custodian account. In any case in
which Custodian does not receive any such due and unpaid income within a
reasonable time after it has made proper demands for the same (which shall be
presumed to consist of at least three demand letters and at least one telephonic
demand), it shall so notify the applicable Fund in writing, including copies of
all demand letters, any written responses thereto, and memoranda of all oral
responses thereto and to telephonic demands, and await proper instructions;
Custodian shall not be obliged to take legal action for collection unless and
until reasonably indemnified to its satisfaction. It shall also notify the
applicable Fund as soon as reasonably practicable whenever income due on
securities, in respect to which such Fund requests such notice, is not collected
in due course.
C. Custodian shall, upon receipt of proper instructions, make
federal funds available to a Fund as of specified times agreed upon from time to
time by Skyline and the Custodian in the amount of checks received in payment
for shares of that Fund which are deposited into that Fund's account.
D. In any and every case where payment for purchase of securities
for the account of a Fund is made by Custodian in advance of receipt of the
securities purchased, in the absence of specific written instructions from
Skyline on behalf of such Fund to so pay in advance, Custodian shall be
absolutely liable to such Fund for such securities to the same extent as if the
securities had been received by Custodian, except that in the case of repurchase
agreements entered into by the Fund with a bank which is a member of the Federal
Reserve System, Custodian may transfer funds to the account of such bank prior
to the receipt of written evidence that the securities subject to such
repurchase agreement have been transferred by book-
3
<PAGE>
entry into a segregated non-proprietary account of Custodian maintained with a
Federal Reserve Bank or of the safe-keeping receipt, provided that such
securities have in fact been so transferred by book entry.
5. RECEIPT OF SECURITIES
Custodian shall hold in a separate account, and physically segregated
at all times from those of any other persons, firms, or corporations, pursuant
to the provisions of this Agreement, all non-cash property, including securities
received by it from or for the account of each Fund, provided that securities
may be maintained in a securities depository or book entry system in accordance
with the conditions set forth in Section 16 of this Agreement. All such
non-cash property, including securities, shall be held or disposed of by
Custodian for, and subject at all times to the instructions, of Skyline on
behalf of a Fund and pursuant to the terms of this Agreement. Custodian shall
have no power or authority to assign, hypothecate, pledge, or otherwise dispose
of any such securities and investments, except pursuant to the direction of
Skyline on behalf of a Fund and only for the account of such Fund as set forth
in paragraph 6 of this Agreement.
6. SEGREGATED ACCOUNTS
Upon receipt of proper instructions, the Custodian shall establish and
maintain a segregated account(s) for and on behalf of each Fund, into which
account(s) may be transferred cash and/or securities.
7. TRANSFER, EXCHANGE, REDELIVERY, ETC. OF SECURITIES
Custodian shall have sole power to release or deliver any securities
of a Fund held by it pursuant to this Agreement. Custodian agrees to transfer,
exchange or deliver securities held by it hereunder only upon receipt of proper
instructions, which may by their terms be continuing instructions when deemed
appropriate by the parties, and only:
(a) upon sales of such securities for the account of the Fund and
receipt by Custodian of payment therefor;
(b) when such securities are called, redeemed or retired or otherwise
become payable, provided that the cash or other consideration
therefor is to be delivered to Custodian;
(c) for examination by any broker selling any such securities in
accordance with "street delivery" custom;
(d) in exchange for, or upon conversion into, other securities alone
or other securities and cash whether pursuant to any plan of
merger, consolidation, reorganization, recapitalization or
readjustment, or otherwise;
4
<PAGE>
(e) upon conversion of such securities pursuant to their terms into
other securities, provided that the securities and cash, if any,
are to be delivered to Custodian;
(f) upon exercise of subscription, purchase or other similar rights
represented by such securities, provided that the securities and
cash, if any, are to be delivered to Custodian;
(g) for the purpose of exchanging interim receipts or temporary
securities for definitive securities, provided that the
definitive securities are to be delivered to Custodian;
(h) for the purpose of redeeming in kind shares of beneficial
interest of a Fund upon delivery thereof to Custodian;
(i) upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by a Fund; or
(j) for other proper corporate purposes.
Before making any such transfer, exchange or delivery, Custodian shall
receive (and may rely upon) an officers' certificate requesting such transfer,
exchange or delivery, and stating that it is for a purpose permitted under the
terms of items (a), (b), (c), (d), (e), (f), (g), (h), or (i) of this Section 6
and also, in respect of item (j), upon receipt of an officers' certificate
specifying the securities to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of such securities
shall be made, provided, however, that an officers' certificate need not precede
any such transfer, exchange or delivery of a money market instrument, or any
other security with same or next-day settlement, if the President, a Vice
President, the Secretary or the Treasurer of Skyline's issues appropriate oral
or facsimile instructions to Custodian and an appropriate officers' certificate
is received by Custodian within two business days thereafter.
8. CUSTODIAN'S ACTS WITHOUT INSTRUCTIONS
Unless and until Custodian receives an officers' certificate to the
contrary, Custodian shall: (a) present for payment all coupons and other income
items held by it for the account of a Fund, which call for payment upon
presentation and hold the cash received by it upon such payment for the account
of that Fund; (b) collect interest and cash dividends received, with notice to
the Fund, for the account of a Fund; (c) hold for the account of a Fund
hereunder all stock dividends, rights and similar securities issued with respect
to any securities held by it hereunder; and (d) execute, as agent on behalf of a
Fund, all necessary ownership certificates required by the Internal Revenue Code
or the Income Tax Regulations of the United States Treasury Department or under
the laws of any state now or hereafter in effect, inserting the Fund's name on
such certificates as the owner of the securities covered thereby, to the extent
it may lawfully do so.
5
<PAGE>
9. REGISTRATION OF SECURITIES
Except as otherwise directed by an officers' certificate, Custodian
shall register all securities, except such as are in bearer form, in the name of
the applicable Fund or of any nominee for the applicable Fund or of any
registered nominee of Custodian assigned exclusively to the applicable Fund (as
defined in the Internal Revenue Code and any Regulations of the Treasury
Department issued hereunder or in any provision of any subsequent federal tax
law exempting such transaction from liability for stock transfer taxes), and
shall execute and deliver all such certificates in connection therewith as may
be required by such laws or regulations or under the laws of any state.
Skyline shall from time to time furnish to Custodian appropriate
instruments to enable Custodian to hold or deliver in proper form for transfer,
or to register in the name of the applicable registered nominee, any securities
which it may hold for the account of a Fund and which may from time to time be
registered in the name of a Fund. All securities accepted by Custodian on
behalf of a Fund hereunder shall be in "street" or other good delivery form.
10. VOTING AND OTHER ACTION
Neither Custodian nor any nominee of Custodian shall vote any of the
securities held hereunder by or for the account of a Fund, except in accordance
with the instructions contained in an officers' certificate. Custodian shall
deliver, or cause to be executed and delivered, to Skyline all notices, proxies
and proxy soliciting materials with relation to such securities, such proxies to
be executed by the registered holder of such securities (if registered otherwise
than in the name of the Fund), but without indicating the manner in which such
proxies are to be voted.
Custodian shall transmit promptly to the applicable Fund all written
information (including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith) received by
Custodian from issuers of the securities being held for such Fund. With respect
to tender or exchange offers, Custodian shall transmit promptly to the Fund all
written information received by Custodian from issuers of the securities whose
tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If a Fund desires to take action with respect to any
tender offer, exchange offer or any other similar transaction, the Fund shall
notify Custodian at least two business days prior to the date on which Custodian
is to take action.
11. TRANSFER TAX AND OTHER DISBURSEMENTS
Each Fund shall pay or reimburse Custodian from time to time for any
transfer taxes payable upon transfers of securities of that Fund made hereunder.
The Manager shall pay or reimburse Custodian from time to time for all other
necessary and proper disbursements and expenses made or incurred by Custodian in
the performance of this Agreement.
Custodian shall execute and deliver such certificates in connection
with securities delivered to it or by it under this Agreement as may be required
under the provisions of the
6
<PAGE>
Internal Revenue Code and any Regulations of the Treasury Department issued
thereunder, or under the laws of any state, to exempt from taxation any
exemptable transfers and/or deliveries of any such securities.
12. CONCERNING CUSTODIAN
Custodian shall be paid by the Manager as compensation for its
services pursuant to this Agreement such compensation as may from time to time
be agreed upon in writing among the parties. Until modified in writing, such
compensation shall be as set forth in Exhibit A attached hereto.
So long as and to the extent that it exercises reasonable care,
Custodian shall not be liable for any action taken in good faith upon any
certificate herein described or certified copy of any resolution of the Board of
Trustees of Skyline, and may rely on the genuineness of any such document which
it may in good faith believe to have been validly executed.
Skyline agrees on behalf of each Fund to indemnify and hold harmless
Custodian and its nominee from all taxes, charges, expenses, assessments, claims
and liabilities (including counsel fees) incurred or assessed against it or by
its nominee in connection with the performance of this Agreement as to that
Fund, except such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct. Custodian is authorized to
charge any account of the Funds for such items. In the event of any advance of
cash for any purpose made by Custodian resulting from orders or instructions of
Skyline, on behalf of a Fund, or in the event that Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Agreement, except such as
may arise from its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the account of that
Fund shall be security therefore.
13. SUBCUSTODIANS
Custodian is hereby authorized to engage another bank or trust company
as a Subcustodian for all or any part of a Fund's assets, provided that such
bank or trust company is a bank or trust company organized under the laws of any
state of the United States, having an aggregate capital, surplus and undivided
profit, as shown by its last published report, of not less than Two Million
Dollars ($2,000,000); and provided further that if the Custodian utilizes the
services of a Subcustodian, the Custodian shall remain fully liable and
responsible to each Fund on account of actions or omissions of the Subcustodian
as fully as if the Custodian was directly responsible for any such losses under
the terms of the Custodian Agreement.
Notwithstanding anything contained herein, if Skyline on behalf of a
Fund requires the Custodian to engage specific Subcustodians for the safekeeping
and/or clearing of assets, Skyline on behalf of that Fund agrees to indemnify
and hold harmless Custodian from all claims, expenses and liabilities incurred
or assessed against it in connection with the use of such Subcustodian in regard
to the Fund's assets, except as may arise from its own negligent action,
negligent failure to act or willful misconduct.
7
<PAGE>
14. REPORTS BY CUSTODIAN
Custodian shall furnish each Fund periodically as agreed upon with a
statement summarizing all transactions and entries for the account of that Fund.
Custodian shall furnish to each Fund, at the end of every month, a list of the
portfolio securities showing the aggregate cost of each issue and a list of all
securities transactions that remain unsettled at such time. The books and
records of Custodian pertaining to its actions under this Agreement shall be
open to inspection and audit at reasonable times by officers of, and of auditors
employed by, Skyline.
15. TERMINATION OR ASSIGNMENT
This Agreement may be terminated by Skyline, or by Custodian, on
ninety (90) days notice, given in writing and sent by registered mail to
Custodian at P.O. Box 20S4, Milwaukee, Wisconsin 53201, or to Skyline at 311
South Wacker Drive, Chicago, Illinois 60606-6675, as the case may be. Upon any
termination of this Agreement, Custodian shall deliver to the successor
custodian appointed by Skyline's Board of Trustees (as evidenced by a certified
vote) at the office of the Custodian, all securities and other property held by
it hereunder, with such securities duly endorsed for transfer. If no such
successor custodian shall be appointed, Custodian shall, in like manner, upon
receipt of a certified copy of a vote of the Board of Trustees of Skyline,
deliver at the office of Custodian such securities, funds and other properties
in accordance with such vote. In the event that no written order designating a
successor custodian or certified copy of a vote of the Board of Trustees shall
have been delivered to Custodian on or before the date when such termination
shall become effective, then Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, of its own selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than $25,000,000,
all securities, funds and other properties held by Custodian and all instruments
held by Custodian relative thereto and all other property held by it under this
Agreement. Thereafter, such bank or trust company shall be the successor of
Custodian under this Agreement. Notwithstanding the foregoing, custodian shall
not be required to make any such delivery or payment until full payment shall
have been made of all liabilities constituting a charge on or against the
properties then held by custodian or on or against custodian, and until full
payment shall have been made to custodian of all its fees, compensation costs
and expenses, subject to the provisions of Section 12 of this Agreement. In the
event that securities, funds and other properties remain in the possession of
Custodian after the date of termination hereof owning to failure of Skyline to
procure the certified copy of vote referred to or of the Board of Trustees to
appoint a successor custodian, Custodian shall be entitled to compensation for
its services during such period as Custodian retains possession of such
securities, funds and other properties in accordance with the fee schedule most
recently in effect and the provisions of this Agreement relating to the duties
and obligations of Custodian shall remain in full force and effect.
This Agreement may not be assigned by Custodian without the consent of
the Funds, authorized or approved by a resolution of its Board of Trustees.
This Agreement supersedes and terminates, as of the close of business on the
date hereof, all prior contracts between Custodian and Skyline relating to
custody of the assets of the Funds.
8
<PAGE>
16. DEPOSITS OF SECURITIES IN SECURITIES DEPOSITORIES
Custodian may deposit and/or maintain securities owned by the Funds in
a clearing agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, each of which is referred to herein as "a
Securities System," in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and subject to
the following provisions:
1. Custodian may keep securities of a Fund in a Securities System
provided that such securities are represented in an account
("Account") of Custodian in the Securities System which shall not
include any assets of Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2. The records of Custodian with respect to securities of each Fund which
are maintained in the Securities System shall identify by book-entry
those securities belonging to the Fund;
3. Custodian shall pay for securities purchased for the account of a Fund
upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account, and (ii) the making
of an entry on the records of Custodian to reflect such payment and
transfer for the account of the Fund. Custodian shall transfer
securities sold or loaned for the account of a Fund upon (i) receipt
of advice from the Securities System that payment or collateral for
such securities has been transferred to the Account, and (ii) the
making of an entry on the records of Custodian to reflect such
transfer and payment for the account of the Fund. Copies of all
advices from the Securities System of transfers of securities for the
account of a Fund shall identify the Fund, be maintained for the Fund
by Custodian and be provided to the Fund at its request.
4. Custodian shall promptly provide Skyline with any report obtained by
Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the Securities System;
5. Anything to the contrary herein notwithstanding, Custodian shall be
liable to a Fund for any loss or damage to such Fund resulting from
use of the Securities System by reason of any negligence, misfeasance
or misconduct of Custodian or any of its agents or of any of its or
their employees or from failure of Custodian or any such agent to
enforce effectively such rights as it may have against the Securities
System; at the election of the Fund, it shall be entitled to be
subrogated to the rights of Custodian with respect to any claim
against the Securities System or any other person which Custodian may
have as a consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or damage;
9
<PAGE>
6. Custodian shall not be authorized to act under this Section in the
absence of an appropriate certificate of Skyline that the Board of
Trustees has approved the use of a particular Securities Systems and
any changes to arrangements in connection therewith.
17. INDEPENDENT ACCOUNTANTS. Custodian shall provide the Funds, at such times
as Skyline may reasonably require, with reports by independent public
accountants on the accounting system, internal accounting control and procedures
for safeguarding securities, including securities deposited and/or maintained in
a Securities System, relating to the services provided by Custodian under this
Agreement; such reports, which shall be of sufficient scope and in sufficient
detail, as may reasonably be required by Skyline, to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, shall so state.
18. RECORDS
Custodian shall prepare and maintain any records relating to its
activities hereunder in such manner as will meet the obligations of Skyline
pursuant to the provisions of the Investment Company Act of 1940, as amended, or
the rules and regulations promulgated thereunder, and applicable federal and
state tax laws and regulations. All such records shall be the property of
Skyline and Custodian agrees to make any such records available to Skyline its
dependent auditors and the Securities and Exchange Commission upon request and
to preserve such records for the periods prescribed in Rule 31a-2 under the
Investment Company Act of 1940, as amended and applicable federal and state tax
laws and regulations.
19. DISCLAIMER OF LIABILITY
This agreement is executed on behalf of Skyline by its officers in
their capacities as officers and not individually. The obligations of Skyline
under this agreement are not binding upon Skyline's trustees, officers, or
shareholders individually but are binding only upon the assets and property of
Skyline, or of the Fund to which the services performed pursuant to this
Agreement relate. Skyline's Declaration of Trust is on file with the Secretary
of the Commonwealth of Massachusetts.
20. ADDITIONAL SERIES
Skyline is authorized to issue separate classes of shares of
beneficial interest representing interests in separate investment portfolios.
The parties intend that each portfolio established by Skyline, now or in the
future, be covered by the terms and conditions of this Agreement. In order for
a future portfolio to be covered by this Agreement, Skyline shall give notice to
the Custodian of the designation of and the expected effective date of such
portfolio.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and their respective corporate seals to be affixed hereto as of the
date first above-written by their respective officers thereunto duly authorized.
Executed in several counterparts, each of which is an original.
Attest: FIRSTAR TRUST COMPANY
By: /s/ Gail M. Zess By: /s/ James C. Tyler
--------------------------- ------------------------------
Title: Senior Trust President Title: Vice President
------------------------ ---------------------------
Attest: SKYLINE ASSET MANAGEMENT, L.P.
By: /s/ Scott C. Blim By: /s/ William M. Dutton
--------------------------- ------------------------------
Title: Chief Financial Officer Title: Managing Partner
------------------------ ---------------------------
Attest: SKYLINE FUNDS
By: /s/ Scott C. Blim By: /s/ William M. Dutton
--------------------------- ------------------------------
Title: Secretary Title: President
------------------------ ---------------------------
11
<PAGE>
MUTUAL FUND CUSTODIAL AGENT SERVICE
SKYLINE SPECIAL EQUITIES PORTFOLIO,
SKYLINE SPECIAL EQUITIES II and
SKYLINE SMALL CAP CONTRARIAN
ANNUAL FEE SCHEDULE
- - Annual fee based on market value of assets:
- $0.15 per $1,000 (1.5 basis points)
- $3,000 minimum for Skyline Small Cap Contrarian
- - Investment transactions: (purchase, sale, exchange, tender, redemption,
maturity, receipt, delivery)
- $12.00 per book entry security (depository or Federal Reserve system)
for Skyline Special Equities Portfolio and Skyline Special Equities
II, but $8.00 for Skyline Small Cap Contrarian
- $25.00 per definitive security (physical)
- $75.00 per Euroclear
- $ 8.00 per principal reduction pass-through certificates
- $35.00 per option/futures contract
- $15.00 per variation margin transaction
$12.00 per commercial paper transaction
- $10.00 per Fed wire deposit or withdrawal for Skyline Special Equities
Portfolio and Skyline Special Equities II, but $15.00 for Skyline
Small Cap Contrarian
- - Variable Amount Notes: Used as a short-term investment, variable amount
notes offer safety and prevailing high interest rates. Our charge, which
is 1/4 of 1%, is deducted from the variable amount note income at the time
it is credited to your account
- - Extraordinary expenses: Based on time and complexity involved
- - Out-of-pocket expenses: Charged to the account
- - Fees are billed; monthly, based on market value at the beginning of the
month
<PAGE>
AMENDED AND RESTATED
TRANSFER AGENT AGREEMENT
THIS AGREEMENT is made and entered into on this 31st day of August, 1995
and amended on December 15, 1997 by and among Skyline Funds, a Massachusetts
business trust ("Skyline"), Skyline Asset Management, L.P., a Delaware limited
partnership (the "Manager"), and Firstar Trust Company, a corporation organized
under the laws of the State of Wisconsin (hereinafter referred to as the
"Agent").
W I T N E S S E T H:
WHEREAS, Skyline is an open-end management investment company registered
under the Investment Company Act of 1940;
WHEREAS, Skyline has three series, Skyline Special Equities Portfolio,
Skyline Special Equities II and Skyline Small Cap Contrarian (each a "Fund" and
together, the "Funds");
WHEREAS, the Agent is a trust company and, among other things, is in the
business of administering transfer and dividend disbursing agent functions for
the benefit of its customers; and
NOW THEREFORE, Skyline, the Manager, and the Agent do mutually promise and
agree as follows:
1. TERMS OF APPOINTMENT; DUTIES OF THE AGENT
Subject to the terms and conditions set forth in this Agreement, Skyline
hereby employs and appoints the Agent to act as transfer agent and dividend
disbursing agent for each Fund.
The Agent shall perform all of the customary services of a transfer agent
and dividend disbursing agent, and as relevant, agent in connection with
accumulation, open account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), in accordance with the
conditions and procedures set forth in the prospectus and statement of
additional information relating to shares of the Funds as in effect from time to
time (together, the "prospectus") including but not limited to:
A. Receive orders for the purchase of shares, with prompt delivery, where
appropriate, of payment and supporting documentation to the Funds'
custodian;
B. Process purchase orders and issue the appropriate number of
certificated or uncertificated shares with such uncertificated shares
being held in the appropriate shareholder account;
C. Process redemption requests received in good order and, where
relevant, deliver appropriate documentation to the Funds' custodian;
<PAGE>
D. Pay monies (upon receipt from the Fund's custodian, where relevant) in
accordance with the instructions of redeeming shareholders;
E. Process transfers of shares in accordance with the shareowner's
instructions;
F. Process exchanges between Funds or between a Fund and any other mutual
fund with which a Fund offers an exchange privilege, as described from
time to time in a Fund's prospectus;
G. Issue and/or cancel certificates as instructed; replace lost, stolen
or destroyed certificates upon receipt of satisfactory indemnification
or surety bond;
H. Prepare and transmit or credit payments for dividends and
distributions declared by the Funds;
I. Make changes to shareholder records, including, but not limited to,
address changes in plans (i.e., systematic withdrawal, automatic
investment, dividend reinvestment, etc.);
J. Record the issuance of shares of the Funds and maintain, pursuant to
Rule 17ad-10(e), a record of the total number of shares of the Funds
which are authorized, issued and outstanding;
K. Prepare shareholder meeting lists and, if applicable, mail, receive
and tabulate proxies;
L. Mail shareholder reports and prospectuses to current shareholders;
M. Prepare, mail to shareholders, and file U.S. Treasury Department forms
1099 and other appropriate information returns required with respect
to dividends and distributions for all shareholders;
N. Provide shareholder account information upon request, and prepare and
mail confirmations and statements of account to shareholders for all
purchases, redemptions and other confirmable transactions as agreed
upon with the Funds; and
O. Provide a Blue Sky System which will enable the Funds to monitor the
total number of shares sold in each state. In addition, the Funds
shall identify to the Agent in writing those transactions and assets
to be treated as exempt from the Blue Sky reporting to the Funds for
each state. The responsibility of the Agent for the Funds' Blue Sky
state registration status is solely limited to the reporting of such
transactions to the Funds.
P. Create and maintain records showing for each investor's account the
following:
A. Names, addresses, and tax identifying numbers;
2
<PAGE>
B. Number of shares held;
C. Historical information regarding the account of each shareholder,
including dividends paid and date and price for all transactions;
D. Any stop or restraining order placed against the account;
E. Information with respect to withholdings in the case of a foreign
account;
F. Any dividend reinvestment order, plan application, dividend
address, and correspondence relating to the current maintenance
of the account;
G. Certificate numbers and denominations for any shareholder holding
certificates; and
H. Any information required in order for the Agent to perform the
calculations contemplated or required by this Agreement.
2. COMPENSATION
The Manager agrees to pay the Agent for performance of the duties listed in
this Agreement as may be agreed from time to time in writing and for reasonable
fees and out-of-pocket expenses including but not limited to the following:
printing, postage, forms, stationery, record retention, mailing, insertion,
programming, labels, shareholder lists and proxy expenses.
These fees and reimbursable expenses may be changed from time to time
subject to mutual written agreement between Skyline and the Agent.
The Manager agrees to pay all fees and reimbursable expenses within thirty
(30) calendar days following the mailing of the billing notice.
3. REPRESENTATIONS OF AGENT
The Agent represents and warrants to Skyline that:
A. It is a trust company duly organized, existing and in good standing
under the laws of Wisconsin;
B. It is duly qualified to carry on its business in the state of
Wisconsin;
C. It is empowered under applicable laws and by its charter and bylaws to
enter into and perform this Agreement;
D. All requisite corporate proceedings have been taken to authorize it to
enter and perform this Agreement; and
3
<PAGE>
E. It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
4. REPRESENTATIONS OF SKYLINE
Skyline represents and warrants to the Agent that:
A. It is an open-end diversified investment company under the Investment
Company Act of 1940;
B. It is a business trust organized, existing, and in good standing under
the laws of Massachusetts;
C. It is empowered under applicable laws and by its Declaration of Trust
and bylaws to enter into and perform this Agreement;
D. All necessary proceedings required by the Declaration of Trust have
been taken to authorize it to enter into and perform this Agreement;
and
E. A registration statement under the Securities Act of 1933 is currently
effective and will remain effective, and appropriate state securities
law filings have been made and will continue to be made, with respect
to all shares of the Funds being offered for sale.
5. REPRESENTATIONS OF MANAGER
Manager represents and warrants to Skyline and the Agent that:
A. It is a limited partnership organized, existing, and in good standing
under the laws of Delaware;
B. It is empowered under applicable laws and by its Agreement of Limited
Partnership to enter into and perform this Agreement; and
C. All requisite action required by its Agreement of Limited Partnership
has been taken to authorize it to enter into and perform this
Agreement.
6. COVENANTS OF SKYLINE AND AGENT
Skyline shall furnish the Agent a certified copy of the resolution of the
Board of Trustees of Skyline authorizing the appointment of the Agent and the
execution of this Agreement. Skyline shall provide to the Agent a copy of its
Declaration of Trust, and bylaws, and all amendments thereto.
The Agent shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended, and
the rules thereunder, the Agent agrees that
4
<PAGE>
all such records prepared or maintained by the Agent relating to the services to
be performed by the Agent hereunder are the property of Skyline and will be
preserved, maintained and made available in accordance with such section and
rules and will be surrendered to Skyline on and in accordance with their
request.
7. INDEMNIFICATION; REMEDIES UPON BREACH
The Agent agrees to use reasonable care and act in good faith in performing
its duties hereunder.
Provided that the Agent has used reasonable care and acted in good faith,
the Agent shall not be liable or responsible for delays or errors occurring by
reason of circumstances beyond its control, including acts of civil or military
authority, national or state emergencies, fire, mechanical or equipment failure,
flood or catastrophe, acts of God, insurrection or war. In the event of a
mechanical breakdown beyond its control, the Agent shall take all reasonable
steps to minimize service interruptions for any period that such interruption
continues beyond the Agent's control. The Agent will make every reasonable
effort to restore any lost or damaged data, and the correcting of any errors
resulting from such a breakdown will be at the Agent's expense. The Agent
agrees that it shall, at all times, have reasonable contingency plans with
appropriate parties, making reasonable provision for emergency use of electrical
data processing equipment to the extent appropriate equipment is available.
Representatives of Skyline or the Manager shall be entitled to inspect the
Agent's premises and operating capabilities at any time during regular business
hours of the Agent, upon reasonable notice to the Agent.
Skyline, on behalf of a Fund, will indemnify and hold the Agent harmless
against any and all losses, claims, damages, liabilities or expenses (including
reasonable counsel fees and expenses) resulting from any claim, demand, action
or suit not resulting from the Agent's bad faith or negligence, and arising out
of or in connection with the Agent's duties on behalf of that Fund hereunder,
including as a result of the Agent acting upon telephone instructions relating
to the exchange or redemption of shares received by the Agent and reasonably
believed by the Agent to have originated from the record owner of the subject
shares; or as a result of the Agent acting upon any instructions executed or
orally communicated by a person duly authorized by Skyline's Board of Trustees
to give such instructions to the Agent by Skyline, according to such lists of
authorized persons furnished to the Agent; or a result of acting in reliance
upon any genuine instrument or stock certificate signed, countersigned or
executed by any person or persons authorized to sign, countersign or execute the
same.
In order for this section to apply, it is understood that if in any case
Skyline may be asked to indemnify or hold harmless the Agent, Skyline shall be
advised of all pertinent facts concerning the situation in question, and it is
further understood that the Agent will use reasonable care to notify Skyline
promptly concerning any situation which presents or appears likely to present a
claim for indemnification against Skyline. Skyline shall have the option to
defend the Agent against any claim which may be the subject of this
indemnification and, in the event that Skyline so elect, Skyline will so notify
the Agent, and thereupon Skyline shall take over complete defense of the claim
and the Agent shall sustain no further legal or other expenses
5
<PAGE>
in such situation for which the Agent shall seek indemnification under this
section. The Agent will in no case confess any claim or make any compromise in
any case in which Skyline will be asked to indemnify the Agent, except with
Skyline's prior written consent.
8. CONFIDENTIALITY
The Agent agrees on behalf of itself and its employees to treat
confidentially all records and other information relative to the Funds and their
shareholders and shall not be disclosed to any other party, except after prior
notification to and approval in writing by Skyline, on behalf of a Fund which
approval shall not be unreasonably withheld and may not be withheld where the
Agent may be exposed to civil or criminal contempt proceedings for failure to
comply after being requested to divulge such information by duly constituted
authorities.
9. WISCONSIN LAW TO APPLY
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the state of Wisconsin.
10. ADDITIONAL SERIES
Skyline is authorized to issue separate classes of shares of
beneficial interest representing interests in separate investment portfolios.
The parties intend that each portfolio established by Skyline, now or in the
future, be covered by the terms and conditions of this Agreement. In order for
a future portfolio to be covered by this Agreement, Skyline shall give notice to
the Custodian of the designation of and the expected effective date of such
portfolio.
11. AMENDMENT, ASSIGNMENT, TERMINATION AND NOTICE
A. This Agreement may be amended by the mutual written consent of the
parties.
B. This Agreement may be terminated upon ninety (90) day's written notice
given by one party to the other.
C. This Agreement and any right or obligation hereunder may not be
assigned by either party without the signed, written consent of the
other party.
D. Any notice required to be given by the parties to each other under the
terms of this Agreement shall be in writing, addressed and delivered,
or mailed to the principal place of business of the other party.
E. In the event that Skyline on behalf of a Fund gives to the Agent its
written intention to terminate and appoint a successor transfer agent,
the Agent agrees to cooperate in the transfer of its duties and
responsibilities to the successor, including any and all relevant
books, records and other data established or maintained by the Agent
under this Agreement.
6
<PAGE>
F. Should Skyline on behalf of a Fund exercise its right to terminate,
all out-of-pocket expenses associated with the movement of records and
material that are approved in writing in advance by Skyline or the
Manager will be paid by the Manager.
G. This Agreement supersedes and terminates, as of the close of business
on the date hereof, all prior agreements between Skyline and Agent
relating to transfer agency services and shareholder servicing.
12. DISCLAIMER OF LIABILITY
This agreement is executed on behalf of Skyline by its officers in their
capacities as officers and not individually. The obligations of Skyline under
this agreement are not binding upon Skyline's trustees, officers, or
shareholders individually but are binding only upon the assets and property of
Skyline, or of the Fund to which the services performed pursuant to this
agreement relate. Skyline's Declaration of Trust is on file with the Secretary
of the Commonwealth of Massachusetts.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and their respective corporate seals to be affixed hereto as of the date first
above-written by their respective officers thereunto duly authorized.
Executed in several counterparts, each of which is an original.
Attest: FIRSTAR TRUST COMPANY
By: /s/ Gail M. Zess By: /s/ James C. Tyler
-------------------------------- --------------------------------
Title: Senior Trust President Title: Vice President
-------------------------------- --------------------------------
Attest: SKYLINE ASSET MANAGEMENT, L.P.
By: /s/ Scott C. Blim By: /s/ William M. Dutton
-------------------------------- --------------------------------
Title: Chief Financial Officer Title: Managing Partner
-------------------------------- --------------------------------
Attest: SKYLINE FUNDS
By: /s/ Scott C. Blim By: /s/ William M. Dutton
-------------------------------- --------------------------------
Title: Secretary Title: President
-------------------------------- --------------------------------
8
<PAGE>
FIRSTAR TRUST COMPANY
MUTUAL FUND SERVICES
SHAREHOLDER ACCOUNTING SERVICES
SKYLINE SPECIAL EQUITIES PORTFOLIO,
SKYLINE SPECIAL EQUITIES II AND
SKYLINE SMALL CAP CONTRARIAN
ANNUAL FEE SCHEDULE
Annual Fee Schedule
$14.00 per open shareholder account
$11.00 per open networked account
$6.00 per closed shareholder account
Minimum annual fees of $6,000 for Skyline Special Equities Portfolio and Skyline
Special Equities II, but minimum annual fees of $4,000 for Skyline Small
Cap Contrarian
$12.00 per Fed wire transfer (billed to investors)
Plus out-of-pocket expenses, including but not limited to:
Postage
Programming
Stationery, envelopes
Mailing
Proxies
Retention of records
Microfilm/fiche of records
Special reports
All other out-of-pocket expenses
ACH fees
Fees are billed monthly
<PAGE>
AMENDED AND RESTATED
FUND ACCOUNTING SERVICING AGREEMENT
This contract among Skyline Funds, a Massachusetts business trust ("Skyline"),
Skyline Asset Management, L.P., a Delaware limited partnership which acts as
investment adviser to Skyline ("Manager"), and Firstar Trust Company, a
Wisconsin corporation, (hereinafter called "FTC") is entered into on this 31st
day of August, 1995 and amended and restated on this 15th day of December, 1997.
WITNESSETH:
WHEREAS, Skyline is an open-end management investment company registered
under the Investment Company Act of 1940 and currently offering shares of
beneficial interest in series designated Skyline Special Equities Portfolio,
Skyline Special Equities II and Skyline Small Cap Contrarian (each a "Fund" and
together the "Funds"); and
WHEREAS, the Manager has entered into an Investment Advisory Agreement with
Skyline (the "Investment Advisory Agreement") for each Fund whereby Manager has
agreed to make certain payments and pay certain expenses on behalf of the Fund;
WHEREAS, FTC is in the business of providing, among other things, mutual
fund accounting services to investment companies;
NOW, THEREFORE, the parties do mutually promise and agree as follows:
1. SERVICES. FTC agrees to provide the following mutual fund accounting
services to each Fund:
A. Portfolio Accounting Services:
(1) Maintain portfolio records on a trade date +1 basis using
security trade information communicated from the Manager on a timely
basis.
(2) For each valuation date, obtain prices from a pricing source
approved by Skyline's Board of Trustees and apply those prices to the
portfolio positions. For those securities where market quotations are
not readily available, Skyline's Board of Trustees shall approve, in
good faith, the method for determining the fair value for such
securities.
(3) Identify interest and dividend accrual balances as of each
valuation date and calculate gross earnings on investments for the
accounting period.
(4) Determine gain/loss on sales of portfolio securities of each
Fund and identify them as to short-short, short- or long-term status;
account for periodic
<PAGE>
distributions of gains or losses to shareholders and maintain
undistributed gain or loss balances as of each valuation date.
B. Expense Accrual and Payment Services:
(1) For each valuation date, calculate the expense accrual
amounts as directed by the Funds as to methodology, rate or dollar
amount.
(2) Record payments for Fund expenses upon receipt of written
authorization from the Fund.
(3) Account for Fund expenditures and maintain expense accrual
balances at the level of accounting detail, as agreed upon by FTC and
the Fund.
(4) Provide expense accrual and payment reporting.
C. Fund Valuation and Financial Reporting Services:
(1) Account for Fund share purchases, sales, exchanges,
transfers, dividend reinvestments, and other Fund share activity as
reported by the transfer agent on a timely basis.
(2) Apply equalization accounting as directed by the Fund.
(3) Determine net investment income (earnings) for the Fund as
of each valuation date. Account for periodic distributions of
earnings to shareholders and maintain undistributed net investment
income balances as of each valuation date.
(4) Maintain a general ledger for the Fund in the form as agreed
upon.
(5) For each business day of the Fund (as set forth in the
prospectus and statement of additional information of Skyline
(together, the "prospectus")) relating to shares of that Fund as in
effect from time to time, determine the net asset value per share of
the Fund according to the accounting policies and procedures set forth
in the prospectus.
(6) Calculate per share net asset value, per share net earnings,
and other per share amounts reflective of Fund operation at such time
as required by the nature and characteristics of the Fund.
(7) Communicate, at an agreed upon time, the per share net asset
value for each valuation date to parties as agreed upon from time to
time.
(8) Prepare monthly reports which document the adequacy of
accounting detail to support month-end ledger balances.
2
<PAGE>
D. Tax Accounting Services:
(1) Maintain tax accounting records for the investment portfolio
of each Fund to support the tax reporting required for regulated
investment companies under the Internal Revenue Code of 1986, as
amended, and regulations thereunder.
(2) Maintain tax lot detail for the investment portfolio.
(3) Calculate taxable gain/loss on security sales using the tax
cost basis designated by the Fund.
(4) Provide the necessary financial information to support the
taxable components of income and capital gains distributions to the
transfer agent to support tax reporting to the shareholders.
E. Compliance Control Services:
(1) Support reporting to regulatory bodies and support financial
statement preparation by making Fund accounting records available to
Skyline, the Manager, the Securities and Exchange Commission, and
Skyline's outside auditors.
(2) Create and maintain accounting records in a manner and for
such time periods as are necessary to satisfy the obligations of the
Funds under the Investment Company Act of 1940 and regulations
provided thereunder including Section 31 thereof and rules 31a-1 and
31a-2 thereunder, and applicable federal and state tax laws.
2. CHANGES IN ACCOUNTING PROCEDURES. Any resolution passed by Skyline's
Board of Trustees that affects accounting practices and procedures under this
agreement shall be effective upon written receipt and acceptance by FTC.
3. CHANGES IN EQUIPMENT, SYSTEMS, SERVICE, ETC. FTC reserves the right
to make changes from time to time, as it deems advisable, relating to its
services, systems, programs, rules, operating schedules and equipment, so long
as such changes do not adversely affect the service provided to the Funds under
this Agreement.
4. COMPENSATION. FTC shall be compensated by the Manager for providing
the services set forth in this Agreement in accordance with the Fee Schedule
attached hereto as Exhibit A and as mutually agreed upon and amended from time
to time.
5. PERFORMANCE OF SERVICE. FTC shall exercise reasonable care in the
performance of its duties under the Agreement. Skyline agrees to reimburse and
make FTC whole for any loss or damages (including reasonable fees and expenses
of legal counsel) to FTC arising out of or in connection with its actions under
this Agreement, including any act, omission to act, or delay by
3
<PAGE>
FTC in reliance on or in accordance with, any written or oral instruction FTC
receives from any duly authorized officer of Skyline, so long as FTC acts in
good faith and is not negligent or guilty of any willful misconduct.
Except as set forth below, FTC shall not be liable or responsible for
delays or errors occurring by reason of circumstances beyond its control,
including acts of civil or military authority, natural or state emergencies,
fire, mechanical breakdown, flood or catastrophe, acts of God, insurrection,
war, riots or failure of transportation, communication or power supply.
In the event of a mechanical breakdown beyond its control, FTC shall
take all reasonable steps to minimize service interruptions for any period that
such interruption continues beyond FTC's control. FTC will make every
reasonable effort to restore any lost or damaged data and the correcting of any
errors resulting from such a breakdown will be at the expense of FTC. FTC
agrees that it shall at all times have reasonable contingency plans with
appropriate parties, making reasonable provision for emergency use of electrical
data processing equipment to the extent appropriate equipment is available.
Representatives of Skyline and the Manager and their agents shall be entitled to
inspect FTC's premises and operating capabilities at any time during regular
business hours of FTC, upon reasonable notice to FTC.
Regardless of the above, FTC reserves the right to reprocess and
correct administrative errors at its own expense.
6. NO AGENCY RELATIONSHIP. Nothing herein contained shall be deemed to
authorize or empower FTC to act as agent for any other party to this Agreement,
or to conduct business in the name of, or for the account of, any other party to
this Agreement.
7. OWNERSHIP OF RECORDS. All records prepared or maintained by FTC on
behalf of the Funds remain the property of the Funds and will be surrendered
promptly on the written request of an authorized officer of the Funds.
8. CONFIDENTIALITY. FTC shall handle in confidence all information
relating to the Funds' business, which is received by FTC during the course of
rendering any service hereunder.
9. DATA NECESSARY TO PERFORM SERVICES. Skyline or its agent, which may
be the Manager or FTC, shall furnish to FTC the data necessary to perform the
services described herein at times and in such form as mutually agreed upon.
10. NOTIFICATION OF ERROR. Skyline will notify FTC of any balancing or
control error caused by FTC within three (3) business days after receipt of any
reports rendered by FTC to the Funds, or within three (3) business days after
discovery of any error or omission not covered in the balancing or control
procedure, or within three (3) business days of receiving notice from any
shareholder.
11. TERM OF AGREEMENT. This Agreement may be terminated by either party
upon giving ninety (90) days prior written notice to each party or such shorter
period as is mutually agreed upon by the parties. However, this Agreement may
be replaced or modified by a
4
<PAGE>
subsequent agreement between the parties. This Agreement supersedes and
terminates, as of the close of business on the date hereof, all prior agreements
between Skyline and FTC relating to Fund Accounting services.
12. DUTIES IN THE EVENT OF TERMINATION. In the event that in connection
with termination a successor to any of FTC's duties or responsibilities
hereunder is designated by Skyline by written notice to FTC, FTC will promptly,
upon such termination and at the expense of the Manager, transfer to such
Successor all relevant books, records, correspondence and other data established
or maintained by FTC under this Agreement in a form reasonably acceptable to
Skyline (if such form differs from the form in which FTC has maintained the same
in accordance with the terms of this Agreement, the Manager shall pay any
expenses associated with transferring the same to such form), and will cooperate
in the transfer of such duties and responsibilities, including provision for
assistance from FTC's personnel in the establishment of books, records and other
data by such successor.
13. CHOICE OF LAW. This Agreement shall be construed in accordance with
the laws of the State of Wisconsin.
14. ADDITIONAL SERIES. Skyline is authorized to issue separate classes of
shares of beneficial interest representing interests in separate investment
portfolios. The parties intend that each portfolio established by Skyline, now
or in the future, be covered by the terms and conditions of this Agreement. In
order for a future portfolio to be covered by this Agreement, Skyline shall give
notice to the Custodian of the designation of and the expected effective date of
such portfolio.
15. MISCELLANEOUS. This Agreement is executed on behalf of Skyline by its
officers in their capacities as officers and not individually. The obligations
of Skyline under this Agreement are not binding upon Skyline's trustees,
officer, or shareholders individually but are binding only upon the assets and
property of Skyline, or of the Fund to which the services performed pursuant to
this Agreement relate. Skyline's Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and their respective corporate seals to be affixed hereto as of the
date first above-written by their respective officers thereunto duly authorized.
Executed in several counterparts, each of which is an original.
Attest: FIRSTAR TRUST COMPANY
By: /s/ Gail M. Zess By: /s/ James C. Tyler
------------------------------------- ------------------------------
Title: Senior Trust President Title: Vice President
----------------------------------- ---------------------------
Attest: SKYLINE ASSET MANAGEMENT, L.P.
By: /s/ Scott C. Blim By: /s/ William M. Dutton
------------------------------------- ------------------------------
Title: Chief Financial Officer Title: Managing Partner
----------------------------------- ---------------------------
Attest: SKYLINE FUNDS
By: /s/ Scott C. Blim By: /s/ William M. Dutton
------------------------------------- ------------------------------
Title: Secretary Title: President
----------------------------------- ---------------------------
6
<PAGE>
EXHIBIT A
FUND VALUATION AND ACCOUNTING
<TABLE>
<CAPTION>
I. Asset Pricing Costs
Charge per Item per Valuation
Asset Type (daily, weekly, etc.)
- ---------- -----------------------------
<S> <C>
Domestic and Canadian Equities $0.15
Options $0.15
Corporate/Government/Agency Bonds $0.50
CMOs $0.80
International Equities and Bonds $0.50
Municipal Bonds $0.80
Money Market Instruments $0.80
</TABLE>
PRICING COSTS ARE BILLED MONTHLY
II. Annual Base Fees
Skyline Special Equities Portfolio: $22,000 base/year on 1st $40 M
1 bp > $40 M
Skyline Special Equities II: $22,000 base/year on 1st $40 M
1 bp > $40 M
Skyline Small Cap Contrarian: $18,000 base/year on 1st $40 M
1 bp on next $200 M
1/2 bp > $240 M
<PAGE>
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
April 28, 1998
Skyline Funds
311 South Wacker Drive
Suite 4500
Chicago, IL 60606
Ladies and Gentlemen:
As special Massachusetts counsel to Skyline Funds (the "Trust"), a
Massachusetts business trust, we have been asked to render our opinion with
respect to the issuance of an indefinite number of shares of beneficial interest
of the Trust (the "Shares") representing interests in The Special Equities
Portfolio, Skyline Small Cap Value Plus, and Skyline Small Cap Contrarian, each
a series of the Trust, all as more fully described in the Prospectus and
Statement of Additional Information contained in Post-Effective Amendment No. 25
(the "Amendment") to the Trust's Registration Statement on Form N-1A (Securities
Act Registration No. 33-11755, Investment Company Act Registration No.
811-5022) filed with the Securities and Exchange Commission.
We have examined (i) the Agreement and Declaration of Trust of the Trust
dated February 4, 1987, as amended, (ii) the By-Laws of the Trust, (iii) a
certificate as of a recent date of the Secretary of State of The Commonwealth of
Massachusetts as to the good standing of the Trust and the authority of the
Trust to transact business in the Commonwealth, (iv) resolutions adopted at
meetings of the Trustees, (v) the Prospectus and Statement of Additional
Information contained in the Amendment, and (vi) such other documents, records
and certificates as we have deemed necessary for the purposes of this opinion.
As to matters of fact underlying the opinion expressed herein, we have relied
exclusively upon certificates of certain public officials and officers of the
Trust. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents submitted to us as
copies.
Based upon and subject to the foregoing, we are of the opinion that the
Shares, when sold in accordance with the terms of the Prospectus and Statement
of Additional Information in effect at the time of sale, will be legally issued,
fully paid and non-assessable by the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Amendment.
Very truly yours,
/s/ Goodwin, Procter & Hoar LLP
GOODWIN, PROCTER & HOAR LLP
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "Auditors" and to the incorporation by reference of our
reports with respect to Special Equities Portfolio, Small Cap Value Plus
(formerly Special Equities II) and Small Cap Contrarian dated January 16,
1998 in the Registration Statement of Skyline Funds on Form N-1A filed with
the Securities and Exchange Commission in this Post-Effective Amendment No.
25 to the Registration Statement under the Securities Act of 1933 (File No.
33-11755) and in this Amendment No. 27 to the Registration Statement under
the Investment Company Act of 1940 (File No. 811-5022).
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Chicago, Illinois
April 27, 1998
<PAGE>
[LOGO]
SKYLINE IRA PLAN
[PHOTO]
<PAGE>
SKYLINE IRA
SKYLINE INDIVIDUAL RETIREMENT ACCOUNT PLAN
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Regular IRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Roth IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Converting a Regular or SEP-IRA to a Roth IRA. . . . . . . . . . . . 4
SEP-IRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SIMPLE-IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Rollover IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Direct Rollover to a Skyline Funds IRA from a qualified
retirement plan . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Transfer to a Skyline Funds IRA from another IRA . . . . . . . . . . 6
Investment of your IRA . . . . . . . . . . . . . . . . . . . . . . . 6
Tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
When can an account be opened? . . . . . . . . . . . . . . . . . . . 7
Do I pay tax on dividends and distributions? . . . . . . . . . . . . 7
When may I make withdrawals? . . . . . . . . . . . . . . . . . . . . 8
What if I make a withdrawal before age 59 1/2 ?. . . . . . . . . . . 9
Minimum contribution . . . . . . . . . . . . . . . . . . . . . . . . 9
Disclosure Statement - General information for all IRAs. . . . . . .10
Disclosure Statement for Regular IRAs. . . . . . . . . . . . . . . .12
Regular IRA Custodial Agreement. . . . . . . . . . . . . . . . . . .22
Disclosure Statement for Roth IRAs . . . . . . . . . . . . . . . . .31
Roth IRA Custodial Agreement . . . . . . . . . . . . . . . . . . . .38
HOW TO OPEN A SKYLINE FUNDS IRA
Return your signed Skyline Funds IRA Application along with your check
made payable to the Portfolio in which you are investing.
Mail to:
Attn: Skyline Funds
Mutual Fund Services
Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
If you and your spouse are each setting up an IRA, two separate account
applications will be required. Have your spouse fill out the extra application,
and return it along with yours to Firstar Trust Company.
2
<PAGE>
GENERAL INFORMATION
ABOUT THE INDIVIDUAL RETIREMENT ACCOUNT PLAN
- --------------------------------------------------------------------------------
REGULAR IRA
Who qualifies? You qualify in any year when you have earnings from employment
or self-employment. You qualify even if you are also covered by a retirement
program of your employer or a Keogh plan. However, if you and/or your spouse
are active participants in such a plan, your deduction for your IRA contribution
may be reduced or eliminated depending on your income. SEE QUESTION 5 UNDER THE
DISCLOSURE STATEMENT FOR REGULAR IRAS, ARE MY CONTRIBUTIONS TO A REGULAR IRA TAX
DEDUCTIBLE?
You may contribute up to $2,000 or 100% of your earned income, whichever is
less. Alimony and separate maintenance payments are treated as earned income for
this purpose. You may not contribute to your Regular IRA for any year if you are
over age 70 1/2 before the end of the year.
If your spouse has less than $2,000 in earned income and you file a joint
return, you may jointly contribute up to the lesser of $4,000 or 100% of
your combined earned income. The contribution may be divided between your IRA
and your spouse's IRA in any way you decide, so long as the portion allocated to
either one does not exceed $2,000.
ROTH IRA
Beginning in 1998, you may also qualify to contribute to a new type of IRA,
called a "Roth IRA." Contributions to a Roth IRA are not tax deductible.
However, under certain circumstances the entire amount you withdraw from a Roth
IRA is entirely tax free, including the earnings, provided that you wait at
least five years after establishing the Roth IRA to take the distribution, and
that you are either over age 59 1/2 or permanently disabled, or use the money
(up to a lifetime limit of $10,000) for certain first time homebuyer expenses.
This means that the earnings on a Roth IRA may be entirely tax exempt, and not
just tax-deferred as in a Regular IRA, which can result in a much larger
after-tax return on your investment. (Your beneficiary may also withdraw the
funds tax free after your death, subject to the five year requirement.)
The basic limit on your contribution to a Roth IRA in any given year is the same
as for a Regular IRA: the lesser
3
<PAGE>
of $2,000 or 100% of your earned income, whichever is less. (Married couples
filing joint returns can contribute up to $4,000 or 100% of your combined earned
income, as with a Regular IRA.) However, there is also a second limit, which is
based on your adjusted gross income for the year. Your ability to contribute to
a Roth IRA will be limited under the following circumstances: if you are single
and have adjusted gross income of more than $95,000, if you are married, file a
joint tax return, and have adjusted gross income of more than $150,000; or are
married and file separate tax returns. SEE THE DISCLOSURE STATEMENT FOR ROTH
IRAS FOR MORE DETAILS.
The amount you can contribute to a Roth IRA is also reduced by any amount that
you contribute to a Regular IRA in the same year, whether or not the
contribution is deductible. In other words, you are allowed to make a total IRA
contribution of up to $2,000 in any year ($4,000 for a married couple), which
you can split between Regular and Roth IRAs any way you want, subject to the
limits on contributions to Roth IRAs above.
You can contribute to a Roth IRA even after you have reached the age of 70 1/2,
if you otherwise meet the requirements.
CONVERTING A REGULAR OR SEP-IRA TO A ROTH IRA
If you already have a Regular IRA or SEP-IRA, you can convert it into a Roth
IRA, provided that your adjusted gross income for the year does not exceed
$100,000. The same $100,000 limit applies to both single taxpayers and married
taxpayers filing joint returns; a married taxpayer who files
a separate return cannot convert a Regular or SEP-IRA into a Roth IRA. If you
convert a Regular or SEP-IRA into a Roth IRA, you will have to pay tax on the
IRA balance just as if you had withdrawn it. However, any additional amount
that the IRA earns after it is converted to a Roth IRA may escape tax entirely,
as described above. Furthermore, if you convert the IRA in 1998, you are
allowed to spread the tax over four years, from 1998 through 2001. After 1998,
the entire balance in the IRA (less any nondeductible contributions) must be
included in income in the year the IRA is converted.
SEP-IRA
Your employer may set up a simplified employee pension plan (SEP) and contribute
to your IRA and the IRA of each other eligible employee up to $24,000 or 15% of
compensation, whichever is less. The employer contribution must be based on a
written formula, which cannot discriminate in favor of officers, shareholders or
self-employed or highly compensated individuals.
You can have a Regular IRA or Roth IRA, even if you have a SEP-IRA, too. SEE
QUESTION 8 UNDER THE DISCLOSURE STATEMENT FOR REGULAR IRAS, CAN A SIMPLIFIED
EMPLOYEE PENSION PLAN BE
4
<PAGE>
USED IN CONJUNCTION WITH A REGULAR IRA?, FOR MORE DETAILS.
SIMPLE-IRA
Up until 1997, employers with up to 25 employees could allow eligible employees
to elect to have a portion of their pay withheld and contributed to a special
type of SEP-IRA called a "salary reduction SEP", or SAR-SEP. New SAR-SEPs were
abolished in 1997 (although contributions can still be made to a SAR-SEP
established before 1997), and a new type of IRA, called a SIMPLE-IRA, was
established in their place for employers with up to 100 employees. In a
SIMPLE-IRA, you can elect to have up to $6,000 of your compensation in any year
withheld and deposited in an IRA, and your employer must generally make an
additional contribution to your account as well. SIMPLE-IRAs are otherwise very
similar to SEP-IRAs. SEE THE DISCLOSURE STATEMENT FOR MORE DETAILS.
The Skyline Funds IRA Application cannot be used for a SIMPLE-IRA. Contact
Skyline Funds at 1-800-458-5222 for the necessary forms if you or your employer
is interested in this type of plan.
ROLLOVER IRA
If you receive a distribution from the qualified retirement plan of a former
employer, you may be eligible to roll over the distribution to a Regular or
SEP-IRA free of tax. You may under certain circumstances make a rollover again
to the profit sharing or pension plan of a new employer. If you want to have
that right, however, your rollover IRA derived from an employer's qualified plan
must be kept separate from any other IRA you may have. Qualified retirement
plans are required to withhold 20% of most distributions to you for payment of
income taxes unless your plan balance is transferred directly to an IRA or
another qualified plan. This means that a direct transfer may be preferable to
a rollover for moving your qualified plan balance to a Skyline Funds IRA.
SEE "DIRECT ROLLOVER TO A SKYLINE FUNDS IRA FROM A QUALIFIED RETIREMENT PLAN."
You may also make a rollover to a Skyline Funds IRA from another IRA. However,
a rollover of the same funds from one IRA to another may be made no more than
once during a 12-month period. An amount withdrawn from a SIMPLE-IRA during the
first two years of participation may only be rolled over into another
SIMPLE-IRA.
Generally speaking, distributions from a Roth IRA can only be rolled over to
another Roth IRA, and distributions from a Regular or SEP-IRA can only be rolled
over to another Regular or SEP-IRA. However, you can roll over a distribution
from a Regular or SEP-IRA to a Roth IRA, provided that your adjusted gross
income for the year (determined without regard to the distribution) is not more
than $100,000. The tax consequences of such a
5
<PAGE>
rollover are the same as converting a non-Roth IRA to a Roth IRA, as described
above.
Any rollover must be made within 60 days after receipt of the distribution from
your employer's qualified plan or your previous IRA. Otherwise, the
distribution will be subject to tax for the year you receive it.
DIRECT ROLLOVER TO A SKYLINE FUNDS IRA FROM A QUALIFIED RETIREMENT PLAN
You may directly rollover funds from your employer's qualified retirement plan
to a Skyline Funds Regular IRA or SEP-IRA. Retirement plans are required to
rollover most types of distributions directly to an IRA if the employee directs,
and are also required to withhold 20% of the distribution for taxes if a
distribution is not transferred directly to an IRA or another plan. Generally
speaking, these rules regarding direct transfers apply to any distribution that
could be rolled over into an IRA.
The procedure for making a direct transfer from a retirement plan into a
Skyline Funds IRA is the same as the procedure for a direct transfer from
another IRA.
TRANSFER TO A SKYLINE FUNDS IRA FROM ANOTHER IRA
You may also transfer funds directly from another IRA to a Skyline Funds IRA.
The 12-month restriction on IRA rollovers does not apply to direct transfers,
but such a transfer is otherwise subject to the rules governing rollovers
between IRAs discussed above. The transfer must be direct from your existing
IRA to a Skyline Funds IRA without your having physical contact with the funds
transferred. To make a transfer:
1. Complete the Skyline Funds IRA Application.
2. Complete the Transfer Form to instruct your present custodian or
trustee to transfer the assets of your present account to Firstar
Trust Company as successor custodian. Have your signature guaranteed
if required by your present custodian.
3. Send the completed Transfer Form, along with the Skyline Funds IRA
Application, to Firstar Trust Company.
4. Firstar Trust Company and your present custodian or trustee will
complete the details of transferring your funds to your Skyline Funds
IRA.
INVESTMENT OF YOUR IRA
Contributions to your IRA are invested at your election in one of the Skyline
Funds or Skyline-Firstar Money Market Fund.
TAX BENEFITS
You may be able to deduct part or all of the yearly contributions to your
Regular IRA from your gross income,
6
<PAGE>
depending on whether you and/or your spouse are active participants in a
retirement program of your employer or a Keogh plan, and depending on your
income. SEE QUESTION 5 IN THE DISCLOSURE STATEMENT FOR REGULAR IRAS, ARE MY
CONTRIBUTIONS TO A REGULAR IRA TAX DEDUCTIBLE?. You may claim such a deduction
even if you do not itemize your deductions. In addition, the tax on the amount
earned by an IRA is deferred until the earnings are distributed and, in the case
of a Roth IRA, may be eliminated entirely.
The Skyline Funds IRAs are in the form of IRS Form 5305-A (for Regular and
SEP-IRAs) and IRS Form 5305-RA (for Roth IRAs), which are automatically deemed
acceptable by the Internal Revenue Service. The approval by the IRS relates only
to the form of the account and not to the merits of using the account as a
retirement plan.
WHEN CAN AN ACCOUNT BE OPENED?
You can open a Regular or Roth IRA account and make a contribution for any year
at any time up to the due date of your federal income tax return for that year
(excluding extensions). (However, Roth IRAs were not available until 1998, so
you couldn't make a contribution to a Roth IRA for 1997, even if the
contribution is made by April 15, 1998.) Rollovers and direct transfers from
other IRAs or retirement plans can be made at any time during the year, so long
as a rollover contribution is made within 60 days after the distribution from
the other IRA or retirement plan is received by you. A distribution from
a qualified plan may be subject to income tax even if the distribution is rolled
over to an IRA.
SEE ROLLOVER IRA AND DIRECT ROLLOVER TO A SKYLINE FUNDS IRA FROM A QUALIFIED
PLAN.
DO I PAY TAX ON DIVIDENDS AND DISTRIBUTIONS?
No, all dividends and distributions accumulate tax-free. Tax is paid on a
Regular or SEP-IRA when you (or your beneficiary) withdraw your retirement
benefits. You may never have to pay tax on a Roth IRA, provided that you meet
BOTH of the following requirements. First, you must wait until after the end of
the fifth year beginning with the first year in which you established a Roth IRA
before taking the distribution. In other words, if you first establish a Roth
IRA in 1998, you can begin receiving tax-free distributions (if you also pass
the second test) beginning in 2003. Generally, this five year requirement is
satisfied for all Roth IRAs once five years have passed after you (or your
spouse) established any Roth IRA. However, the five year rule is applied
separately to Roth IRAs that are converted from a Regular or SEP-IRA, or receive
rollovers from a Regular or SEP-IRA.
Second, even if you have satisfied the five year test, you can only receive tax
free distributions if you are over age 59 1/2, are permanently disabled, or use
the
7
<PAGE>
amount withdrawn to pay "qualified first time homebuyer expenses." "Qualified
first time homebuyer expenses" are any amount paid to purchase, build, or
reconstruct a principal residence for you, or for one of your or your spouse's
children, grandchildren, or ancestors, provided that the person whose residence
is purchased (and his or her spouse) has not owned any other residence within
the previous two years. The total amount that you can treat as qualified first
time homebuyer expenses during your lifetime (either for purposes of avoiding
tax on distributions from a Roth IRA or avoiding the 10% penalty tax on
premature distributions from a Regular IRA or employer retirement plan) is
$10,000. This limit applies to the person making the withdrawal, not the person
for whom the home is purchased. Your beneficiary may also make tax-exempt
withdrawals from your Roth IRA after your death, if the five year rule is
satisfied.
WHEN MAY I MAKE WITHDRAWALS?
Withdrawals can start at any time, although there may be a penalty imposed on
amounts that you withdraw before age 59 1/2. Withdrawals from a Regular IRA or
SEP-IRA (but not a Roth IRA) must start by April 1 after the end of the year in
which you (or your spouse, in the case of a spousal account) reach age 70 1/2.
Withdrawals can be made in a lump sum or in installments.
The Internal Revenue Code imposes complex limits on the length of time over
which withdrawals from an IRA can be made. Withdrawals from a Regular or SEP-IRA
are subject to tax as ordinary income, except for any portion rolled over to
another IRA or considered to be a return of nondeductible contributions.
Withdrawals from a Roth IRA do not have to begin when you are age 70 1/2, and
may be tax exempt, as discussed under "Do I pay tax on dividends and
distributions?" on the previous page.
When you die, your beneficiary generally must withdraw the balance in your IRA
(including a Roth IRA) within five years. Certain exceptions may permit your
beneficiary to withdraw the balance in installments over his or her lifetime.
These rules are complex, and your beneficiary should consult a qualified tax
advisor.
If you elect to receive distributions from an IRA in installments over your life
expectancy, you must also decide how your life expectancy will be determined.
The same may be true of your spouse if he or she elects to receive distributions
in installments after your death. The Skyline Funds IRA provides that your life
expectancy (and that of your spouse, if applicable), will be recalculated every
year. However, you or your spouse may also elect not to have life expectancies
recalculated. This is an important decision which may have significant tax
consequences, and the decision
8
<PAGE>
you or your spouse makes will generally be irrevocable after you or your spouse
begin receiving mandatory minimum distributions. You or your spouse should
always consult a qualified tax advisor when you are required to begin receiving
minimum distributions.
WHAT IF I MAKE A WITHDRAWAL BEFORE AGE 59 1/2?
A withdrawal can be made without penalty before age 59 1/2 only in case of death
or permanent disability, in the case of certain periodic payments, or to pay
certain medical expenses (including certain medical insurance premiums if you
are unemployed). Beginning in 1998, you may also make withdrawals without
penalty to pay certain higher education expenses for you or your dependents, or
to pay "qualified first time homebuyer expenses" as described in "DO I PAY TAX
ON DIVIDENDS AND DISTRIBUTIONS?". Keep in mind, however, that a withdrawal from
a Roth IRA before you are 59 1/2 may cause the income to be taxable, even if
the 10% penalty does not apply.
A withdrawal before age 59 1/2 that doesn't satisfy one of these exceptions is
a premature withdrawal and is subject to a penalty tax of 10% of the portion
that is included in your income, in addition to the regular income tax. But
neither the regular income tax nor the 10% penalty tax applies to any portion
rolled over to another IRA or considered as a return of your nondeductible
contributions. If you make a withdrawal from a SIMPLE-IRA during the first two
years of your participation, the penalty tax is 25% INSTEAD OF 10%.
MINIMUM CONTRIBUTION
The initial contribution to a Skyline Funds IRA must be at least $1,000.
Subsequent contributions must be at least $100. However, you are not required to
make a contribution every year.
- ---------------------------
The Skyline Funds IRA Plan is sponsored by Skyline Funds. This brief outline of
the Plan is not intended as a full explanation of the Individual Retirement
Plan, but we hope that we have answered some of your basic questions.
WE URGE YOU TO READ THE ATTACHED MATERIAL THOROUGHLY.
IF YOU WOULD LIKE TO KNOW MORE ABOUT THE SKYLINE FUNDS, PLEASE
CALL US AT 1.800.458.5222.
9
<PAGE>
DISCLOSURE STATEMENT
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Please read the following information together with the Individual
Retirement Account Custodial Agreement and the Prospectus(es) for the Fund(s)
you select for investment of IRA contributions.
GENERAL PRINCIPLES
(1) ARE THERE DIFFERENT TYPES OF IRAS?
Yes. Upon creation of an IRA, you must designate whether the IRA will be a
Regular IRA or a Roth IRA. (In addition, there are SEP-IRAs and SIMPLE IRAs,
which are discussed in the Disclosure Statement for Regular IRAs. Education IRAs
are not offered by Skyline Funds).
In a Regular IRA, amounts contributed to the IRA may be tax deductible at
the time of contribution. Distributions from the IRA will be taxed at
distribution except to the extent that the distribution represents a return of
your own contributions for which you did not claim (or were not eligible to
claim) a deduction.
In a Roth IRA, amounts contributed to your IRA are taxed at the time of
contribution, but distributions from the IRA are not subject to tax if you have
held the IRA for certain minimum periods of time (generally, until age 59 1/2
but in some cases a longer or shorter period may apply).
Each type of IRA is a custodial account created for the exclusive benefit
of the beneficiary, which is you or your spouse. Firstar Trust Company serves
as custodian of the IRA. Your or your spouse's interest in the account is
nonforfeitable.
(2) CAN I REVOKE MY ACCOUNT?
This account may be revoked any time within seven calendar days after
it is established by mailing or delivering a written request for revocation to:
Skyline Funds
c/o Firstar Trust Company
615 East Michigan Street
3rd Floor
Milwaukee, Wisconsin 53202
Attention: Mutual Fund Department
10
<PAGE>
If the revocation is mailed, the date of the postmark (or the date of
certification if sent by certified or registered mail) will be considered the
revocation date. Upon proper revocation, a full refund of the initial
contribution will be issued, without any adjustments for items such as
administrative fees or fluctuations in market value. You may always revoke your
account after this time, but the amounts distributed to you will be subject to
the tax rules applicable upon distribution from an IRA account as discussed
below. (While current regulations technically only extend the right to revoke to
Regular IRAs, it has been assumed that that right applies to Roth IRAs as well
and such IRAs will thus be administered consistent with that interpretation
until the IRS issues guidance to the contrary.)
(3) HOW WILL MY ACCOUNT BE INVESTED?
Contributions made to an IRA will be invested, at your election, in one or
more of the regulated investment companies for which Skyline Asset Management,
L.P. serves as investment advisor or any other regulated investment company
designated by Skyline Asset Management L.P. No part of the IRA may be invested
in life insurance contracts; further, the assets of
the IRA may not be commingled with other property.
Information about the shares of each mutual fund available for investment
by your IRA must be furnished to you in the form of a prospectus governed by
rules of the Securities and Exchange Commission. Please refer to the prospectus
for detailed information concerning your mutual fund. You may obtain further
information concerning IRAs from any District Office of the Internal Revenue
Service.
Fees and other expenses of maintaining your account may be charged to you
or your account. The Custodian's current fee schedule is included below.
Annual maintenance fee per account* $12.50
Transfer to successor trustee 15.00
Distribution to a participant 15.00
(exclusive of systematic withdrawal plans)
Refund of excess contribution 15.00
Federal wire fee 12.00
*capped at $25.00 per social security number.
11
<PAGE>
DISCLOSURE STATEMENT
FOR REGULAR IRAS
- --------------------------------------------------------------------------------
(1) AM I ELIGIBLE TO CONTRIBUTE TO A REGULAR IRA?
Employees with compensation income and self-employed individuals with
earned income are eligible to contribute to a Regular IRA. (For convenience, all
future references to compensation are deemed to mean "earned income" in the case
of a self-employed individual.) Employers may also contribute to Regular IRAs
established for the benefit of their employees. In addition, you may establish a
Regular IRA to receive rollover contributions and transfers from the trustee or
custodian of another Regular IRA or the custodian or trustee of certain other
retirement plans.
(2) WHEN CAN I MAKE CONTRIBUTIONS?
You may make regular contributions to your Regular IRA any time up to and
including the due date for filing your tax return for the year, not including
extensions. You may continue to make regular contributions to your Regular IRA
up to (but not including) the calendar year in which you reach age 70 1/2.
(If you are over age 70 1/2 but your spouse has not yet attained that age,
contributions to your spouse's Regular IRA may continue so long as you and your
spouse, based on a joint tax return, have sufficient compensation income.)
Employer contributions to a Simplified Employee Pension Plan or a SIMPLE Plan
may be continued after you attain age 70 1/2. Eligible rollover contributions
and transfers may be made at any time, including after you reach age 70 1/2.
(3) HOW MUCH MAY I CONTRIBUTE TO A REGULAR IRA?
You may make annual contributions to a Regular IRA in any amount up to 100%
of your compensation for the year or $2,000, whichever is less. The $2,000
limitation is reduced by contributions you make to a Roth IRA for the same year,
but is not reduced by contributions to an Educational IRA for the benefit of
another taxpayer. Qualifying rollover contributions and transfers are not
subject to these limitations.
In addition, if you are married and file a joint return, you may make
contributions to your spouse's Regular IRA. However, the maximum amount
contributed to both your own and to your spouse's Regular IRA may not exceed
100% of your combined compensation or $4,000, whichever is less. The maximum
amount that may be contributed to either your Regular IRA or your spouse's
Regular IRA is $2,000. Again, these dollar limits are reduced by any
contributions you or your spouse make to a Roth IRA.
(4) CAN I ROLLOVER OR TRANSFER AMOUNTS FROM OTHER IRAS OR EMPLOYER PLANS?
You are allowed to "roll over" a distribution or transfer your assets from
one Regular IRA to another without any tax liability. Rollovers between Regular
12
<PAGE>
IRAs may be made once per year and must be accomplished within 60 calendar
days after the original date of the distribution. Also, under certain
conditions, you may roll over (tax-free) all or a portion of a distribution
received from a qualified plan or tax-sheltered annuity in which you participate
or in which your deceased spouse participated. However, strict limitations apply
to such rollovers, and you should seek competent advice in order to comply with
all of the rules governing rollovers.
Most distributions from qualified retirement plans will be subject to a 20%
withholding requirement. The 20% withholding can be avoided by electing a
"direct rollover" of the distribution to a Regular IRA or to certain other types
of retirement plans. You should receive more information regarding these
withholding rules and whether your distribution can be transferred to a Regular
IRA from the plan administrator prior to receiving your distribution. (Note that
legislation pending as of this printing would deny your ability to rollover a
hardship distribution from an employer's plan to your IRA.)
(5) ARE MY CONTRIBUTIONS TO A REGULAR IRA TAX DEDUCTIBLE?
Although you may make a contribution to a Regular IRA within the
limitations described above, all or a portion of your contribution may be
nondeductible. No deduction is allowed for a rollover contribution (including a
"direct rollover") or transfer. For "regular" contributions, the taxability of
your contribution depends upon your tax filing status, whether you (and in some
cases your spouse) are an "active participant" in an employer-sponsored
retirement plan, and your income level.
If you are not married (including a taxpayer filing under the "head of
household" status), the following rules apply:
If you are not an "active participant" in an employer-sponsored retirement
plan, you may make a fully deductible contribution to a Regular IRA (up to the
contribution limits described above).
If you are an "active participant" in an employer-sponsored retirement
plan in 1997, you may make a fully deductible 1997 contribution to a Regular
IRA(up to the contribution limits described above) if your adjusted gross income
as defined below) does not exceed $25,000 for 1997. If your 1997 adjusted gross
income is between $25,000 and $35,000, your deduction will be limited as
described below. If your adjusted gross income exceeds $35,000, your
contribution will not be deductible. In 1998, these upper and lower limits are
increased by $5,000, so that you can make a fully deductible contribution if
your adjusted gross income is not more than $30,000, and cannot deduct any
portion of your contribution if your adjusted gross income exceeds $40,000.
After 1998, the upper and lower limits will be increased by an additional $1,000
per year through 2002.
13
<PAGE>
If you are married, the following rules apply:
If you and your spouse file a joint tax return and neither you nor your
spouse is an "active participant" in an employer-sponsored retirement plan, you
and your spouse may make a fully deductible contribution to a Regular IRA (up to
the contribution limits described above).
If you and your spouse file a joint 1997 tax return and either you and your
spouse is an "active participant" in employer-sponsored retirement plans in
1997, you and your spouse may make fully deductible contributions to a Regular
IRA (up to the contribution limits described above, if your 1997 combined
adjusted gross income (as defined below) does not exceed $40,000. If your 1997
adjusted gross income is between $40,000 and $50,000, your deduction will be
limited as described below. If your adjusted gross income exceeds $50,000, your
contribution will not be deductible. In 1998, the upper and lower limits have
each been increased by $10,000, to $50,000 and $60,000 respectively, and, as
with the limits for single taxpayers discussed above, the upper and lower limits
will be increased by an additional $1,000 per year through 2002.
In addition, beginning in 1998 a different rule applies if you and your
spouse file a joint tax return and only one of you is an "active participant" in
an employer-sponsored retirement plan. If your spouse is the "active
participant" but you are not, a fully deductible contribution can be made to
your IRA (up to the contribution limits described above) if your combined
adjusted gross income does not exceed $150,000. If your combined adjusted gross
income is between $150,000 and $160,000, your deduction will be limited as
described below. If your combined adjusted gross income exceeds $160,000, your
contribution will not be deductible. Your spouse, as an active participant in an
employer-sponsored retirement plan, may make a fully deductible contribution to
a Regular IRA if your 1998 combined adjusted gross income does not exceed
$50,000 (with a partial deduction being available if 1998 combined adjusted
gross income is between $50,000 and $60,000). Conversely, if you are an "active
participant" and your spouse is not, a contribution to your Regular IRA will be
deductible if your 1998 combined adjusted gross income does not exceed $50,000
(with a partial deduction being available if 1998 combined adjusted gross income
is between $50,000 and $60,000). These $150,000 and $160,000 amounts are not
increased by an additional $1,000 per year after 1998.
If you are married and file a separate return and are not an "active
participant" in an employer-sponsored retirement plan, you may make a fully
deductible contribution to a Regular IRA (up to the contribution limits
described above). If you are married and filing separately and are an "active
participant" in an employer-sponsored retirement plan, you may not make a fully
deductible contribution to a Regular IRA. A partial deduction is available if
your adjusted gross income is less than $10,000. This amount is not adjusted for
cost-of-living changes or otherwise. However, if you are married, but lived
apart from your spouse at all times during the year and filed separate tax
returns, you are treated the same as a
14
<PAGE>
single taxpayer for purposes of making a deductible contribution to a Regular
IRA.
An employer-sponsored retirement plan includes any of the following
types of retirement plans:
- qualified pension, profit-sharing, or stock bonus plan established in
accordance with IRC 401(a) or 401(k);
- Simplified Employee Pension Plan (SEP) (IRC 408(k));
- retirement plan maintained by a governmental unit or agency (but not a
"457 plan");
- tax-sheltered annuities and custodial accounts (IRC 403(b) and
403(b)(7));
- qualified annuity plan under IRC Section 403(a); or
- Savings Incentive Match Plan for Employees of Small Employers (SIMPLE
Plan).
Generally, you are considered an "active participant" in a defined
contribution plan if an employer contribution or forfeiture was credited to your
account during the year. You are considered an "active participant" in a defined
benefit plan if you are eligible to participate in a plan, even though you elect
not to participate. You are also treated as an "active participant" if you make
a voluntary or mandatory contribution to any type of plan, even if your employer
makes no contribution to the plan.
For purposes of these rules, adjusted gross income (1) is determined
without regard to the exclusions from income arising under Section 135
(exclusion of certain savings bond interest), Section 137 (exclusion of certain
employer provided adoption expenses) and Section 911 (certain exclusions
applicable to U.S. citizens or residents living abroad) of the Code, (2) is not
reduced for any deduction that you may be entitled to for IRA contributions, and
(3) takes into account the passive loss limitations under Section 469 of the
Code and any taxable benefits under the Social Security Act and Railroad
Retirement Act as determined in accordance with Section 86 of the Code.
Please note that the deduction limits are not the same as the contribution
limits. You can contribute to your Regular IRA in any amount up to the
contribution limits described above (the lesser of $2,000 or 100 percent of your
compensation income). The amount of your contribution that is deductible for
federal income tax purposes is based upon the rules described in this section.
If you (or where applicable, your spouse) is an "active participant" in an
employer-sponsored retirement plan, you can use the following steps to calculate
whether your contribution will be fully or partially deductible:
(a) Subtract the applicable lower income limit from your adjusted
gross income as determined above. (For example, if you are a single
taxpayer, your 1998 income limit is $30,000.) If the result is $10,000 or
more,
15
<PAGE>
you can only make a nondeductible contribution to your Regular IRA.
(b) Divide the above figure by $10,000, and multiply that percentage
by $2,000.
(c) Subtract the dollar amount (result from (b) above) from $2,000 to
determine the amount that is deductible.
If the deduction limit is not a multiple of $10 then it should be rounded
up to the next $10. If you are eligible to make any deductible contribution, you
may make a $200 minimum deductible contribution.
Even if your income exceeds the limits described above, you may make a
contribution to your IRA up to the contribution limitations described in Section
(3). To the extent that your contribution exceeds the deductible limits, it will
be nondeductible. However, earnings on all IRA contributions are tax deferred
until distribution.
(6) WHAT IF I MAKE AN EXCESS CONTRIBUTION?
Contributions that exceed the allowable maximum for federal income tax
purposes are treated as excess contributions. A nondeductible penalty tax of 6%
of the excess amount contributed will be added to your income tax for each year
in which the excess contribution remains in your account.
(7) HOW DO I CORRECT AN EXCESS CONTRIBUTION?
If you make a contribution in excess of your allowable maximum, you may
correct the excess contribution and avoid the 6% penalty tax for that year by
withdrawing the excess contribution and its earnings on or before the date,
including extensions, for filing your tax return for the tax year for which the
contribution was made. Any earnings on the withdrawn excess contribution may be
subject to a 10% early distribution penalty tax if you are under age 59 1/2. In
addition, in certain cases an excess contribution may be withdrawn after the
time for filing your tax return. Finally, excess contributions for one year may
be carried forward and applied against the contribution limitation in succeeding
years.
(8) CAN A SIMPLIFIED EMPLOYEE PENSION PLAN BE USED IN CONJUNCTION WITH A
REGULAR IRA?
A Regular IRA may also be used in connection with a Simplified Employee
Pension Plan established by your employer (or by you if you are self-employed).
In addition, if your SEP Plan was in effect on December 31, 1996 and permitted
salary reduction contributions, you may elect to have your employer make salary
reduction contributions. Several limitations on the amount that may be
contributed apply. First, salary reduction contributions (for plans that are
eligible) may not exceed $10,000 per year (certain lower limits may apply for
highly compensated employees). The $10,000 limit applies for 1998 and is
adjusted periodically for cost of living increases. Second, the combination of
16
<PAGE>
all contributions for any year (including employer contributions and, if your
SEP Plan is eligible, salary reduction contributions) cannot exceed 15 percent
of compensation (disregarding for this purpose compensation in excess of
$160,000 per year). The $160,000 compensation limit applies for 1998 and is
adjusted periodically for cost of living increases. A number of special rules
apply to SEP Plans, including a requirement that contributions generally be made
on behalf of all employees of the employer (including for this purpose a sole
proprietorship or partnership) who satisfy certain minimum participation
requirements. It is your responsibility and that of your employer to see that
contributions in excess of normal IRA limits are made under and in accordance
with a valid SEP Plan.
(9) CAN A SAVINGS AND INCENTIVE MATCH PLAN FOR EMPLOYEES OF SMALL EMPLOYERS
("SIMPLE") BE USED IN CONJUNCTION WITH A REGULAR IRA?
A Regular IRA may also be used in connection with a SIMPLE Plan established
by your employer (or by you if you are self-employed). When this is done, the
IRA is known as a SIMPLE IRA, although it is similar to a Regular IRA with the
exceptions described below. Under a SIMPLE Plan, you may elect to have your
employer make salary reduction contributions of up to $6,000 per year to your
SIMPLE IRA. The $6,000 limit applies for 1998 and is adjusted periodically for
cost of living increases. In addition, your employer will contribute certain
amounts to your SIMPLE IRA, either as a matching contribution to those
participants who make salary reduction contributions or as a non-elective
contribution to all eligible participants whether or not making salary reduction
contributions. A number of special rules apply to SIMPLE Plans, including (1) a
SIMPLE Plan generally is available only to employers with not more than 100
employees, (2) contributions must be made on behalf of all employees of the
employer (other than bargaining unit employees) who satisfy certain minimum
participation requirements, (3) contributions are made to a special SIMPLE IRA
that is separate and apart from your other IRAs, (4) if you withdraw from your
SIMPLE IRA during the two-year period during which you first began participation
in the SIMPLE Plan, the early distribution excise tax (if otherwise applicable)
is increased to 25 percent; and (5) during this two-year period, any amount
withdrawn may be rolled over tax-free only into another SIMPLE IRA (and not to a
Regular IRA (that is not a SIMPLE IRA) or to a Roth IRA). It is your
responsibility and that of your employer to see that contributions in excess of
normal IRA limits are made under and in accordance with a valid SIMPLE Plan.
(10) WHAT FORMS OF DISTRIBUTION ARE AVAILABLE FROM A REGULAR IRA?
You may at any time request distribution of all or any portion of your
account. Any distributions from your IRA are subject to payment of the
Custodian's distribution fees, as described above. In addition, distributions
made prior to your attainment of age 59 1/2 may be subject to an additional 10
percent penalty tax. Once you reach your "required beginning date" (see Section
11),
17
<PAGE>
distribution of your account may be made in any one of three methods:
(a) a lump-sum distribution,
(b) installments over a period not extending beyond your life
expectancy (as determined by actuarial tables), or
(c) installments over a period not extending beyond the joint life
expectancy of you and your designated beneficiary (as determined by actuarial
tables).
You may also use your account balance to purchase an annuity contract, in
which case your custodial account will terminate.
(11) WHEN MUST DISTRIBUTIONS FROM A REGULAR IRA BEGIN?
You must begin receiving the assets in your account no later than April 1
following the calendar year in which you reach age 70 1/2 (your "required
beginning date"). In general, the minimum amount that must be distributed each
year is equal to the amount obtained by dividing the balance in your Regular IRA
on the last day of the prior year (or the last day of the year prior to the year
in which you attain age 70 1/2) by your life expectancy, the joint life
expectancy of you and your beneficiary, or the specified payment term, whichever
is applicable. A federal tax penalty may be imposed against you if the required
minimum distribution is not made for the year you reach age 70 1/2 and for each
year thereafter. The penalty is equal to 50% of the amount by which the actual
distribution is less than the required minimum.
Unless you or your spouse elects otherwise, your life expectancy and/or the
life expectancy of your spouse will be recalculated annually. (The election, if
you choose to make it, must be made by your required beginning date.) This
election may have significant tax consequences and you should consult a
qualified tax advisor before deciding whether or not to make it. Once you reach
your required beginning date, an election not to recalculate life
expectancy(ies) is irrevocable and will apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
If you have two or more Regular IRAs, you may satisfy the minimum
distribution requirements by receiving a distribution from one of your Regular
IRAs in an amount sufficient to satisfy the minimum distribution requirements
for your other Regular IRAs. You must still calculate the required minimum
distribution separately for each Regular IRA, but then such amounts may be
totaled and the total distribution taken from one or more of your individual
Regular IRAs.
Distribution from your Regular IRA must satisfy the special "incidental
death benefit" rules of the Internal Revenue Code. These provisions set forth
certain limitations on the joint life expectancy of you and your beneficiary.
If your beneficiary is not your spouse, your beneficiary generally will be
18
<PAGE>
considered to be no more than 10 years younger than you for the purpose of
calculating the minimum amount that must be distributed.
As noted above, all distributions, whether or not required under the tax
laws, are subject to payment of the Custodian's distribution fees.
(12) ARE THERE DISTRIBUTION RULES THAT APPLY AFTER MY DEATH?
Yes. If you die before receiving the balance of your Regular IRA,
distribution of your remaining account balance is subject to several special
rules. If you die on or after your required beginning date, distribution must
continue in a method at least as rapid as under the method of distribution in
effect at your death. If you die before your required beginning date, your
remaining interest will, at the election of your beneficiary or beneficiaries,
(i) be distributed by December 31 of the year in which occurs the fifth
anniversary of your death, or (ii) commence to be distributed by December 31 of
the year following your death over a period not exceeding the life or life
expectancy of your designated beneficiary or beneficiaries.
Two additional distribution options are available if your spouse is the
beneficiary: (i) payments to your spouse may commence as late as December 31 of
the year you would have attained age 70 1/2 and be distributed over a period
not exceeding the life or life expectancy of your spouse, or (ii) your spouse
can simply elect to treat your Regular IRA as his or her own, in which case
distributions will be required to commence by April 1 following the calendar
year in which your spouse attains age 70 1/2.
(13) HOW ARE DISTRIBUTIONS FROM A REGULAR IRA TAXED FOR FEDERAL INCOME TAX
PURPOSES?
Amounts distributed to you are generally includable in your gross income in
the taxable year you receive them and are taxable as ordinary income. To the
extent, however, that any part of a distribution constitutes a return of your
nondeductible contributions, it will not be included in your income. The amount
of any distribution excludable from income is the portion that bears the same
ratio as your aggregate nondeductible contributions bear to the balance of your
Regular IRA at the end of the year (calculated after adding back distributions
during the year). For this purpose, all of your Regular IRAs are treated as a
single Regular IRA. Furthermore, all distributions from a Regular IRA during a
taxable year are to be treated as one distribution. The aggregate amount of
distributions excludable from income for all years cannot exceed the aggregate
nondeductible contributions for all calendar years.
No distribution to you or anyone else from a Regular IRA can qualify for
capital gains treatment under the federal income tax laws. Similarly, you are
not entitled to the special five- or ten-year averaging rule for lump-sum
distributions that may be available to persons receiving distributions from
certain other types of retirement plans. All distributions are taxed to the
recipient as ordinary income
19
<PAGE>
except the portion of a distribution that represents a return of nondeductible
contributions. Historically, so-called "excess distributions" to you as well as
"excess accumulations" remaining in your account as of your date of death were
subject to additional taxes. These additional taxes no longer apply.
YOU MUST INDICATE ON DISTRIBUTION REQUESTS WHETHER OR NOT FEDERAL INCOME
TAXES SHOULD BE WITHHELD. REDEMPTION REQUESTS NOT INDICATING AN ELECTION NOT TO
HAVE FEDERAL INCOME TAX WITHHELD WILL BE SUBJECT TO WITHHOLDING.
Any distribution that is properly rolled over will not be includable in
your gross income. All distributions are subject to the Custodian's distribution
fees, as described on page 11.
(14) ARE THERE PENALTIES FOR EARLY DISTRIBUTION FROM A REGULAR IRA?
Distributions from your Regular IRA made before age 59 1/2 will be subject
(in addition to ordinary income tax) to a 10% nondeductible penalty tax unless
(i) the distribution is a return of nondeductible contributions, (ii) the
distribution is made because of your death, disability, or as part of a series
of substantially equal periodic payments over your life expectancy or the joint
life expectancy of you and your beneficiary, (iii) the distribution is made for
medical expenses in excess of 7.5% of adjusted gross income or, subject to
various limits, is made for reimbursement of certain medical premiums while you
are unemployed, (iv) the distribution is made to pay for certain higher
education expenses for you, your spouse, your child, your grandchild, or the
child or grandchild of your spouse, (v) subject to various limits, the
distribution is used to purchase a first home or, in limited cases, a second or
subsequent home for you, your spouse, or your or your spouse's child, grandchild
or ancestor, or (vi) the distribution is an exempt withdrawal of an excess
contribution. The penalty tax may also be avoided if the distribution is rolled
over to another individual retirement account. See Section 9 for special rules
applicable to distributions from a SIMPLE IRA.
(15) WHAT IF I ENGAGE IN A PROHIBITED TRANSACTION?
If you engage in a "prohibited transaction," as defined in section 4975 of
the Internal Revenue Code, your account will be disqualified, and the entire
balance in your account will be treated as if distributed to you and will be
taxable to you as ordinary income. Examples of prohibited transactions are:
(a) the sale, exchange, or leasing of any property between you
and your account,
(b) the lending of money or other extensions of credit between
you and your account,
(c) the furnishing of goods, services, or facilities between you
and your account.
20
<PAGE>
If you are under age 59 1/2, you may also be subject to the 10% penalty
tax on early distributions.
(16) WHAT IF I PLEDGE MY ACCOUNT?
If you use (pledge) all or part of your Regular IRA as security for a loan,
then the portion so pledged will be treated as if distributed to you and will be
taxable to you as ordinary income during the year in which you make such pledge.
The 10% penalty tax on early distributions may also apply.
(17) HOW ARE CONTRIBUTIONS TO A REGULAR IRA REPORTED FOR FEDERAL TAX PURPOSES?
Deductible contributions to your Regular IRA may be claimed as a deduction
on your IRS Form 1040 for the taxable year contributed. If any nondeductible
contributions are made by you during a tax year, such amounts must be reported
on Form 8606 and attached to your Federal Income Tax Return for the year
contributed. If you report a nondeductible contribution to your Regular IRA and
do not make the contribution, you will be subject to a $100 penalty for each
overstatement unless a reasonable cause is shown for not contributing. Other
reporting will be required by you in the event that special taxes or penalties
described herein are due. You must also file Form 5329 with
the IRS for each taxable year in which the contribution limits are exceeded, a
premature distribution takes place, or less than the required minimum amount
is distributed from your Regular IRA.
(18) HOW ARE EARNINGS ON MY ACCOUNT CALCULATED AND ALLOCATED?
The method of computing and allocating annual earnings is set forth in
Article VIII, Section 1 of the Individual Retirement Account Custodial
Agreement. The growth in value of your IRA is neither guaranteed nor projected.
Your Individual Retirement Account Plan has been approved as to form by
the Internal Revenue Service. The Internal Revenue Service approval is a
determination only as to the form of the Plan and does not represent a
determination of the merits of the Plan as adopted by you. You may obtain
further information with respect to your Individual Retirement Account from any
district office of the Internal Revenue Service.
(19) INCOME TAX WITHHOLDING
You must indicate on distribution requests whether or not federal income
taxes should be withheld. Redemption requests not indicating an election not to
have federal income tax withheld will be subject to withholding.
21
<PAGE>
FORM 5305-A
(REV. JANUARY 1, 1998)
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
SKYLINE FUNDS INDIVIDUAL RETIREMENT
CUSTODIAL ACCOUNT
(Under Section 408(a) of the Internal Revenue Code)
(January 1, 1998)
ARTICLE I
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or an
employer contribution to a simplified employee pension plan as described in
section 408(k).
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
section 408(a)(5)).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m)) except as otherwise permitted by section 408(m)(3),
which provides an exception for certain gold, silver, and platinum coins, coins
issued under the laws of any state, and certain bullion.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall be made
in accordance with the following requirements and shall otherwise comply with
section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the Depositor under paragraph 3, or to the surviving spouse under paragraph 4,
other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Depositor
and the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
22
<PAGE>
3. The Depositor's entire interest in the custodial account must be, or begin
to be, distributed by the Depositor's required beginning date, April 1 following
the calendar year end in which the Depositor reaches age 70 1/2 . By that date,
the Depositor may elect, in a manner acceptable to the Custodian, to have the
balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the life of the Depositor.
(c) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the joint and last survivor lives of the
Depositor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified period that
may not be longer than the Depositor's life expectancy.
(e) Equal or substantially equal annual payments over a specified period that
may not be longer than the joint life and last survivor expectancy of the
Depositor and his or her designated beneficiary.
4. If the Depositor dies before his or her entire interest is distributed to
him or her, the entire remaining interest will be distributed as follows:
(a) If the Depositor dies on or after distribution of his or her interest has
begun, distribution must continue to be made in accordance with paragraph 3.
(b) If the Depositor dies before distribution of his or her interest has begun,
the entire remaining interest will, at the election of the Depositor or, if the
Depositor has not so elected, at the election of the beneficiary or
beneficiaries, either
(i) Be distributed by December 31 of the year containing the fifth anniversary
of the Depositor's death, or
(ii) Be distributed in equal or substantially equal payments over the life or
life expectancy of the designated beneficiary or beneficiaries starting by
December 31 of the year following the year of the Depositor's death. If,
however, the beneficiary is the Depositor's surviving spouse, then this
distribution is not required to begin before December 31 of the year in which
the Depositor would have reached age 70 1/2 .
(c) Except where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) and its related regulations has irrevocably
commenced, distributions are treated as having begun on the Depositor's required
beginning date, even though payments may actually have been made before that
date.
(d) If the Depositor dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving spouse, no
additional cash contributions or rollover contributions may be accepted in the
account.
23
<PAGE>
5. In the case of a distribution over life expectancy in equal or
substantially equal annual payments, to determine the minimum annual payment for
each year, divide the Depositor's entire interest in the custodial account as of
the close of business on December 31 of the preceding year by the life
expectancy of the Depositor (or the joint life and last survivor expectancy of
the Depositor and the Depositor's designated beneficiary, or the life expectancy
of the designated beneficiary, whichever applies). In the case of distributions
under paragraph 3, determine the initial life expectancy (or joint life and last
survivor expectancy) using the attained ages of the Depositor and designated
beneficiary as of their birthdays in the year the Depositor reaches age 70 1/2 .
In the case of a distribution in accordance with paragraph 4(b)(ii), determine
life expectancy using the attained age of the designated beneficiary as of the
beneficiary's birthday in the year distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary
for the Custodian to prepare any reports required under section 408(i) and
Regulations section 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor prescribed by the Internal Revenue Service.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and the related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear below.
ARTICLE VIII
1. DEFINITIONS.
"Investment Company" shall mean an investment company as defined in Internal
Revenue Code Section 851(a), shares of which Skyline Funds has agreed to offer
for investment under this Account. "Investment Company Shares" or "Shares" shall
mean shares of beneficial interest or capital stock of the Investment Company.
24
<PAGE>
2. INVESTMENT OF ACCOUNT ASSETS.
(a) Each contribution forwarded by the Depositor to the Custodian shall
identify the Depositor's account number and be accompanied by a statement signed
by the Depositor identifying the Investment Company Shares in which that
contribution is to be invested. The Custodian may return to the Depositor,
without liability for interest thereon, any contributions which are not
accompanied by adequate account identification or an appropriate signed
statement directing investment of those contributions.
(b) Contributions shall be invested in whole and fractional Investment Company
Shares at the price and in the manner in which such shares are then being
publicly offered by the Investment Company. All distributions received on
Investment Company Shares held in the Custodial Account shall be reinvested
in like Shares and credited to such Account. If any distribution of Investment
Company Shares may be received at the election of the shareholder in additional
like Shares or in cash or other property, the Custodian shall elect to receive
such distribution in additional like Investment Company Shares.
(c) All Investment Company Shares acquired by the Custodian shall be registered
in the name of the Custodian or its registered nominee. The Depositor shall be
the beneficial owner of all Investment Company Shares held in the Custodial
Account and the Custodian shall not vote any of such shares, except upon written
direction of the Depositor. The Custodian agrees to forward to every Depositor a
then current Prospectus, reports, notices, proxies and related proxy soliciting
materials applicable to Investment Company Shares received by the Custodian.
(d) The Depositor may at any time, by a manually signed direction delivered to
the Custodian, redeem any number of Investment Company Shares held for his
account and reinvest the proceeds in the Shares of any other Investment Company.
Telephone redemptions and reinvestments shall be done at the price and in the
manner in which such Shares are then being redeemed or offered by the respective
Investment Companies.
3. AMENDMENT AND TERMINATION.
(a) Skyline Funds may, with the written approval of the Custodian, amend the
Custodial Account in whole or in part (including retroactive amendments) by
delivering to the Depositor written notice of such amendment setting forth the
substance and effective date of the amendment. The Depositor shall be deemed to
have consented to any such amendments not objected to in writing by the
Depositor within thirty (30) days of receipt of the notice, provided that no
amendment shall cause or permit any part of the assets of the Custodial Account
to be diverted to purposes other than for the exclusive benefit of the Depositor
or his beneficiaries, nor shall any amendment be made except in accordance with
the applicable law and regulations affecting this Custodial Account.
25
<PAGE>
(b) The Depositor may at any time terminate the Custodial Account by delivering
to the Custodian a written notice of such termination setting forth
the effective date thereof, together with any required withholding information.
(c) The Custodial Account created by this Agreement shall automatically
terminate upon distribution to the Depositor or the beneficiary designated under
Paragraph 6 of Article VIII hereof of the entire balance in the Custodial
Account.
(d) Skyline Funds may remove the Custodian at any time upon thirty (30) days
written notice to the Custodian and the Depositor, and may appoint a successor
custodian at any time. The Custodian may elect to terminate the Custodial
Account upon thirty (30) days written notice to the Depositor.
(e) In the event that the assets of any Investment Company in which the
Custodial Account is invested are transferred to or acquired by any other
investment company or other commingled investment fund which is a permissible
investment for an individual retirement account, by merger or otherwise, the
Custodian may make such amendments to this Agreement, or take such other action,
as it may determine to be necessary or appropriate to accomplish such
transaction and the exchange of Investment Company Shares for shares or other
appropriate units of ownership in such successor fund. The consent of the
Depositor shall not be required for any such amendment or action, but the
Depositor shall be promptly notified thereof, and shall have the right to
withdraw the funds in the Custodial Account without fee, charge, load or penalty
of any kind.
4. TAXES AND CUSTODIAL FEES. Any income taxes or other taxes of any kind
whatsoever that may be levied or assessed upon or in respect of the assets
of the Custodial Account, or the income arising therefrom, any transfer taxes
incurred, all other administrative expenses incurred by the Custodian in the
performance of its duties, including fees for legal services rendered to the
Custodian, and the Custodian's compensation, shall be paid from the Custodial
Account. Unusual administrative responsibilities not contemplated by the fee
schedule will result in such additional charges as will reasonably compensate
the Custodian for the services performed.
The Custodian fee listed in the fee schedule will be deducted by the Custodian
from the initial contribution received from the Depositor. The annual
maintenance fee will be deducted on the last business day in September for each
year and enough fund shares will be redeemed to cover this fee. Fees as listed
on the fee schedule will be deducted from the refund or redemption proceeds at
the time of distribution or redemption and the remaining balance will be
remitted to the Depositor in the case of distribution, or will be reinvested in
accordance with the Depositor's instructions.
5. REPORTS AND NOTICES.
(a) The Custodian shall keep adequate records of transactions it is required to
perform hereunder. No later than sixty (60) days after the close of each
calendar
26
<PAGE>
year, or after the Custodian's resignation or removal pursuant to Article VIII,
Paragraph 3, the Custodian shall render to Depositor a written report or reports
reflecting the transactions effected by it during such period and the assets and
liabilities of the Custodial Account at the close of the period.
(b) All communications or notices required or permitted to be given herein
shall be deemed to be given upon receipt by the Custodian at P.O. Box 701,
Milwaukee, Wisconsin 53201-0701, the Investment Company and Skyline Funds
at P.O. Box 701, Milwaukee, Wisconsin 53201-0701, or the Depositor at his most
recent address shown in the Custodian's records. The Depositor agrees to advise
the Custodian promptly, in writing, of any change of address.
6. DESIGNATION OF BENEFICIARY. The Depositor shall have the right, by written
notice to the Custodian, to designate a beneficiary or beneficiaries, primary
and contingent, to receive any benefit to which such Depositor may be entitled
in the event of his death prior to the complete distribution of such benefit. In
the event the Depositor has not designated any beneficiaries, or if all
beneficiaries shall predecease the Depositor, the following persons shall take
in the order named:
(a) Spouse of the Depositor,
(b) If the spouse shall predecease the Depositor, then in equal shares to any
children surviving the Depositor and to the descendants then living of a
deceased child, by the right of representation, or
(c) If the Depositor shall leave neither spouse nor descendants surviving, then
to the personal representative of the Depositor's estate.
The determination of the Custodian as to the person entitled to receive any
distribution from the Custodial Account following the death of the Depositor, if
made in good faith, shall be conclusive and binding on all persons claiming an
interest in the Depository Account; provided that nothing provided herein shall
be construed to preclude the Custodian from filing an action in the nature of
interpleader or other appropriate proceeding in a court of competent
jurisdiction to determine the person entitled to receive such distribution. Any
expenses incurred by the Custodian in determining the person entitled to receive
a distribution from the Custodial Account, including without limitation
attorneys fees in any such action, shall be reimbursed from the Custodial
Account.
7. INALIENABILITY OF BENEFITS. The benefits provided hereunder shall not be
subject to alienation, assignment, garnishment, attachment, execution or levy of
any kind and any attempt to cause such benefits to be so subjected shall not be
recognized except to the extent as may be required by law.
8. ROLLOVER CONTRIBUTIONS. The Custodian may receive rollover contributions as
described in section 408(d)(3) or any other applicable provisions of the Code,
and regulations promulgated thereunder, subject to Article I. If any property is
transferred to the Custodian as a rollover contribution, such property shall be
sold by the Custodian and the proceeds reinvested as provided in section 2 of
this
27
<PAGE>
Article VIII. The Custodian reserves the right to refuse to accept any
contributions which are not in the form of cash.
9. CONFLICT IN PROVISIONS. To the extent that any of the provisions of Article
VIII shall conflict with the provisions of Articles IV, V, or VII, the
provisions of Article VIII shall prevail.
10. STATUS OF DEPOSITORS. Neither the Depositor nor any other person shall have
any legal or equitable right against the Custodian or the Investment Company
except as provided herein. The Depositor agrees to indemnify and hold the
Custodian harmless from and against any liability that the Custodian may incur
in the administration of the Account unless arising from the Custodian's own
negligence or misconduct.
11. LOSS OF EXEMPTION. If the Custodian receives notice that the Depositor's
Account has lost its tax-exempt status under section 408 of the Code for any
reason, including by reason of a transaction prohibited by section 4975 of the
Code, the Custodian shall distribute to the Depositor the entire balance in the
Account, in cash or in kind, in the sole discretion of the Custodian no later
than 90 days after the date the Custodian receives such notice.
12. APPLICABLE STATE LAW. This Custodial Account shall be construed,
administered and enforced according to the laws of the State of Wisconsin except
to the extent Federal law supersedes Wisconsin law.
13. DISTRIBUTIONS TO SURVIVING SPOUSE. If distributions from the Custodial
Account are to be made to the Depositor's surviving spouse, or to a trust of
which the Depositor's surviving spouse is the income beneficiary, the amount
which the surviving spouse (or such trust) is entitled to receive in each year
shall not be less than the income of the Custodial Account (or of the portion of
the Custodial Account with respect to which the surviving spouse or such trust
is the beneficiary) for such year, as determined under section 2056(b)(7) of the
Code.
14. MINIMUM DISTRIBUTIONS; ELECTION NOT TO RECALCULATE LIFE EXPECTANCIES. The
following provisions supplement the provisions of Article IV with respect to
minimum required distributions, and shall control over the provisions of Article
IV in the event of any inconsistency. All paragraph references in this paragraph
14 are to paragraphs of Article IV unless otherwise provided.
(a) If the Depositor fails to withdraw the entire balance in the Custodial
Account by the April 1 of the year following the year in which he attains age
70 1/2, he shall be deemed to have elected to receive payments under
paragraph 3(d) or, if he has a designated beneficiary (as determined under
Part D of Proposed Regulations section 1.401(a)(9)-1) under paragraph 3(e). A
beneficiary shall be deemed to have elected the method described in paragraph
4(b)(ii) if either he withdraws the minimum amount required for the first
year under the method described in paragraph 4(b)(ii) and does not
specifically elect the method described in paragraph 4(b)(i) by the end of
such year, or if the date specified in
28
<PAGE>
paragraph 4(b)(i) occurs first and he has not withdrawn the entire balance in
the Custodial Account by that time; otherwise, the beneficiary shall be deemed
to have elected the method described in paragraph 4(b)(i).
(b) If there is more than one beneficiary entitled to receive distributions on
equal priority upon the death of the Depositor or a prior beneficiary then, to
the extent permitted by Proposed Regulations section 1.401(a)(9)-1, Q&A H-2, and
subject to such requirements and limitations as the Custodian may establish, the
Custodial Account may be divided into separate accounts for purposes of Article
IV and this paragraph.
(c) Notwithstanding the references to "equal or substantially equal" payments,
if the Depositor or a beneficiary is receiving distributions under paragraph
3(d), 3(e), or 4(b)(ii), he may withdraw amounts that exceed the minimum amount
required by paragraph 5 in any year, provided that any excess shall not be
credited against the minimum amount required to be withdrawn in subsequent
years. Withdrawals may also be made at irregular intervals, provided that the
minimum amount required for each year shall be withdrawn by the last day of such
year, except that the minimum amount for the year in which the Depositor attains
age 70 1/2 , but no subsequent year, may be withdrawn by April 1 of the
following year.
(d) In lieu of the methods of recalculating life expectancies annually as
specified in paragraph 2, the Depositor may elect for purposes of paragraph
3(c) or 3(d), and the Depositor's surviving spouse may elect for purposes of
paragraph 4(b)(ii), to have his life expectancy, or his and his designated
beneficiary's joint and last survivor life expectancy, or the surviving
spouse's life expectancy, initially calculated in the year specified in
paragraph 5 and thereafter reduced by one year in each subsequent year. All
elections described in this paragraph 14(d) shall be made in writing in
accordance with procedures established by the Custodian and the Proposed
Regulations or successors thereto. Such elections must be made and, if made,
shall be irrevocable after the date upon which distributions are required to
commence under paragraph 3 or 4(b)(ii).
(e) All references to the Proposed Regulations section 1.401(a)(9)-1 and
1.401(a)(9)-2 contained in Article IV and this paragraph 14 include the
applicable provisions of Proposed Regulations section 1.408-8 applying such
Proposed Regulations to individual retirement accounts, any subsequent
amendments to any such Proposed Regulations, and the applicable provisions of
the permanent Regulations, when issued, all of which are incorporated by
reference and shall control over any contrary provision of this Agreement.
Reference to specific provisions of the Proposed Regulations shall not be
construed to limit reference to other provisions where appropriate in the
interpretation of Article IV and this paragraph 14.
(f) Distributions will be made only upon the request of the Depositor (or the
Depositor's authorized agent, beneficiary, executor, or administrator), in such
form
29
<PAGE>
and manner as is acceptable to the Custodian. For such distributions, life
expectancy and joint-life and last-survivor expectancy are calculated based
on information provided by the Depositor (or the Depositor's authorized agent,
beneficiary, executor, or administrator) using the expected return multiples
under Treasury Regulations Section 1.72-9. The Custodian will not be liable for
errors in such calculations resulting Form its reliance on such information. If
any assets held on the Depositor's behalf in a Custodial Account are transferred
directly to a trustee or Custodian of another individual retirement account
described in Code Section 408(a) established for the Depositor, it shall be the
Depositor's responsibility to ensure that any required minimum distribution
required by Article IV is made prior to giving the Custodian such transfer
instructions.
30
<PAGE>
DISCLOSURE STATEMENT
FOR ROTH IRAS
- ----------------------------------
(1) AM I ELIGIBLE TO CONTRIBUTE TO A ROTH IRA?
Anyone with compensation income whose adjusted gross income does not
exceed the limits described below is eligible to contribute to a Roth IRA.
You may also establish a Roth IRA to receive rollover contributions or
transfers from another Roth IRA or, in some cases, from a Regular IRA. You
may not roll amounts into a Roth IRA from other retirement plans such as an
employer-sponsored qualified plan. Current law does not appear to prohibit a
rollover from a qualified plan into a Regular IRA and then from the Regular
IRA into a Roth IRA; however, such a rollover would be taxable as described
below, and it is possible that the law may be changed to preclude such a
rollover.
(2) WHEN CAN I MAKE CONTRIBUTIONS?
You may make annual contributions to your Roth IRA any time up to
and including the due date for filing your tax return for the year, not
including extensions. Unlike a Regular IRA, you may continue to make regular
contributions to your Roth IRA even after you attain age 70 1/2. In addition,
rollover contributions and transfers (to the extent permitted as discussed
below) may be made at any time, regardless of your age. Roth IRAs are available
for the first time in 1998, so you may not make a contribution to a
Roth IRA for 1997, even if the contribution is made before April 15, 1998.
(3) HOW MUCH MAY I CONTRIBUTE TO A ROTH IRA?
You may make annual contributions to a Roth IRA in any amount up to 100% of
your compensation for the year or $2,000, whichever is less. The $2,000
limitation is reduced by any contributions made by you or on your behalf to a
Regular IRA. (Legislation pending as of this printing clarifies that
contributions to a SEP-IRA or SIMPLE IRA do not reduce your permitted
contribution to a Roth IRA.) Qualifying rollover contributions and transfers
are not subject to these limitations.
In addition, if you are married and file a joint return, you may make
contributions to your spouse's Roth IRA. However, the maximum amount contributed
to both your own and to your spouse's Roth IRA may not exceed 100% of your
combined compensation or $4,000, whichever is less. The maximum amount that may
be contributed to either your Roth IRA or your spouse's Roth IRA is $2,000.
Again, these dollar limits are reduced by any contributions made by or on behalf
of you or your spouse to any other individual retirement plan (such as a Regular
IRA), except that the limit is not reduced for contributions either of you make
to an Education IRA for someone other than yourselves.
As noted in Section 1, your eligibility to contribute to a Roth IRA depends
on your adjusted gross income (as defined below). The amount that you may
31
<PAGE>
contribute to a Roth IRA is reduced proportionately for adjusted gross
income as calculated above which exceeds the applicable dollar amount. The
applicable dollar amount is $95,000 for a taxpayer filing as an individual or
head of household and $150,000 for a taxpayer filing as a married individual
filing a joint tax return. The applicable dollar limit for a taxpayer filing as
a married individual filing a separate return is $0. If your adjusted gross
income as calculated above exceeds the applicable dollar amount by $15,000 or
less ($10,000 or less in the case of a married individual filing jointly), you
may make a contribution to a Roth IRA. The amount you may contribute, however,
will be less than $2,000. (Legislation pending as of this printing would change
the phaseout range for a married individual filing separately to $0 to $10,000.)
Note that the amount you may contribute to a Roth IRA is not affected by your
participation in an employer-sponsored retirement plan.
For this purpose, your adjusted gross income (1) is determined without
regard to the exclusions from income arising under Section 135 (exclusion of
certain savings bond interest), Section 137 (exclusion of certain employer
provided adoption expenses) and Section 911 (certain exclusions applicable to
U.S. citizens or residents living abroad) of the Code, (2) is reduced by the
amount paid under an endowment contract described in Section 408(b) of the Code
which is properly allocated to the cost of life insurance, (3) takes into
account the passive loss limitations under Section 469 of the Code and any
taxable benefits under the Social Security Act and Railroad Retirement Act as
determined in accordance with Section 86 of the Code, (4) does not take into
account income from rollovers of Regular IRAs, and (5) does take into account
the deduction for a Regular IRA. (Legislation pending as of this printing
indicates that the deduction for a contribution to a Regular IRA would not be
taken into account for determining your adjusted gross income.)
To determine the amount you may contribute to a Roth IRA (assuming you have
at least $2,000 of income), use the following calculations:
(a) Subtract the amount contributed on your behalf to all Regular
IRAs from $2,000. This amount is known as the "maximum potential
contribution."
(b) Subtract the applicable dollar amount from your adjusted gross
income as determined above. If the result is $15,000 or more ($10,000 or
more in the case of a married individual filing jointly), you cannot make a
contribution to a Roth IRA.
(c) Divide the above figure, result from (b) above, by $15,000
($10,000 in the case of a married individual filing jointly), and multiply
that percentage by the maximum possible contribution.
(d) Subtract the dollar amount, result from (c) above, from the
maximum possible contribution to determine the amount you may contribute to
a Roth IRA.
32
<PAGE>
(Legislation pending as of this printing indicates that you are eligible
to make a contribution to a Roth IRA of the lesser of: (i) $2,000
(assuming you have at least $2,000 of income) less contributions to all
Regular IRAs or (ii) $2,000 minus the quantity $2,000 times the fraction
determined in part c.)
If the contribution limit is not a multiple of $10 then it should be
rounded up to the next $10. If you are eligible to make any contribution, you
may make a minimum $200 contribution.
Your contribution to a Roth IRA is not reduced by any amount you contribute
to an Education IRA for the benefit of someone other than yourself. If you are
the beneficiary of an Education IRA, additional limits may apply to you. Please
contact your tax advisor for more information.
(4) CAN I ROLLOVER OR TRANSFER AMOUNTS FROM OTHER IRAS?
You are allowed to "roll over" a distribution or transfer your assets from
one Roth IRA to another without any tax liability. Rollovers between Roth IRAs
are permitted once per year and must be accomplished within 60 days after the
distribution. In addition, if you are a single, head of household or married
filing jointly taxpayer and your adjusted gross income is not more than
$100,000, you may roll over amounts from another individual retirement plan
(such as a Regular IRA) to a Roth IRA. Such amounts are subject to tax as if
they were additional income to you for the year, but are not subject to the 10%
penalty tax. (However, under legislation pending as of this printing, if the
amount rolled over is distributed before the end of the five-tax-year period
beginning with the beginning of the tax year of the rollover, a 10% penalty tax
will apply to the taxed portion of the rollover.)
If you roll over amounts from a Regular IRA to a Roth IRA during 1998, you
may take advantage of special tax treatment. Under the special rules, you may
take your rollover into income as if one quarter of the amount rolled over was
distributed to you in 1998 and one quarter of the amount was distributed to you
in each of the following three years.
(Legislation pending as of this printing indicates that if you die prior to
taking all four amounts into income, the remaining amounts are included in
income for the year of your death unless you have a spouse and your spouse
elects to take those amounts into the spouse's income over the remaining
period.)
Subject to the foregoing limits, you may also directly convert a Regular
IRA to a Roth IRA with similar tax results.
Furthermore, if you have made contributions to a Regular IRA during the
year in excess of the deductible limit, you may convert those nondeductible IRA
contributions to contributions to a Roth IRA (subject to the contribution limit
for a Roth IRA).
33
<PAGE>
You may not roll over amounts to a Roth IRA from a qualified
retirement plan or any other retirement plan that is not an individual
retirement plan.
(5) WHAT IF I MAKE AN EXCESS CONTRIBUTION?
Contributions that exceed the allowable maximum for federal income tax
purposes are treated as excess contributions. A nondeductible penalty tax of 6%
of the excess amount contributed will be added to your income tax for each year
in which the excess contribution remains in your account.
(6) HOW DO I CORRECT AN EXCESS CONTRIBUTION?
If you make a contribution in excess of your allowable maximum, you may
correct the excess contribution and avoid the 6% penalty tax for that year by
withdrawing the excess contribution and its earnings on or before the date,
including extensions, for filing your tax return for the tax year for which the
contribution was made. Any earnings on the withdrawn excess contribution may
also be subject to the 10% early distribution penalty tax if you are under age
59 1/2 or have not satisfied the five-year requirement described below. In
addition, although you will still owe penalty taxes for one or more years,
excess contributions may be withdrawn after the time for filing your tax return.
Finally, excess contributions for one year may be carried forward and applied
against the contribution limitation in succeeding years.
(Legislation pending as of this printing would permit an individual who is
partially or entirely ineligible for a Roth IRA to transfer amounts of up to
$2,000 to a nondeductible Regular IRA (subject to reduction for amounts
remaining in the Roth IRA and for other Regular IRA contributions).)
(7) WHAT FORMS OF DISTRIBUTION ARE AVAILABLE FROM A ROTH IRA?
You may at any time request distribution of all or any portion of your
account. However, distributions made prior to your attainment of age 59 1/2 (or
in some cases within five years of establishing your account) may produce
adverse tax consequences. All distributions are subject to the Custodian's
distribution fees, as described on page 11.
(8) WHEN MUST DISTRIBUTIONS FROM A ROTH IRA BEGIN?
Unlike Regular IRAs, there is no requirement that you begin distribution of
your account at any particular age.
(9) ARE THERE DISTRIBUTION RULES THAT APPLY AFTER MY DEATH?
Your account must be distributed after your death in accordance with rules
similar to those that apply to distributions from a Regular IRA. Thus, although
the IRS has not issued guidance it is expected that the rules will require that
your remaining interest in your Roth IRA will, at the election of your
beneficiary or beneficiaries, (i) be distributed by December 31 of the year in
which occurs the fifth anniversary of your death, or (ii) commence to be
distributed by December 31
34
<PAGE>
of the year following your death over a period not exceeding the life or
life expectancy of your designated beneficiary or beneficiaries.
It is expected that two additional distribution options will be available
if your spouse is the beneficiary: (i) payments to your spouse may commence
as late as December 31 of the year you would have attained age 70 1/2 and be
distributed over a period not exceeding the life or life expectancy of your
spouse, or (ii) your spouse can simply elect to treat your Roth IRA as his or
her own, in which case distributions will be required to commence by April 1
following the calendar year in which your spouse attains age 70 1/2.
(10) HOW ARE DISTRIBUTIONS FROM A ROTH IRA TAXED FOR FEDERAL INCOME TAX
PURPOSES?
Amounts distributed to you are generally excludable from your gross income
if they are not received until after the end of the fifth year beginning with
the first year in which you establish a Roth IRA AND they (i) are paid after you
attain age 59 1/2, (ii) are made to your beneficiary after your death, (iii)
are attributable to your becoming disabled, or (iv) subject to various limits,
are made for the purchase of a first home (or for a second or subsequent home in
certain limited cases) for you, your spouse, or your or your spouse's children,
grandchildren, or parents. For example, if you establish a Roth IRA in 1998,
distributions that you receive in years beginning with 2003 may be tax exempt if
they satisfy one of these five requirements. In addition, distributions that are
rolled over to another Roth IRA are not taxable.
In addition, if you roll over funds to your Roth IRA from another
individual retirement plan (such as a Regular IRA or another Roth IRA into which
amounts were rolled from a Regular IRA), the portion of a distribution
attributable to rolled-over amounts which exceeds the amounts taxed in
connection with the conversion to a Roth IRA is includable in income (and
subject to penalty tax) if it is distributed prior to the end of the five-tax-
year period beginning with the start of the tax year during which the rollover
occurred. (Under legislation pending at the date of this printing, an amount
taxed in connection with a rollover would be subject to a 10% penalty tax if it
is distributed before the end of the five-tax-year period. The pending
legislation also suggests that if an individual makes multiple taxable rollovers
to the same Roth IRA, the five-year period runs from the date of the most recent
rollover.)
In any event, any part of a distribution to you that constitutes a return
of your contributions will not be included in your taxable income. Amounts
distributed to you are treated as coming first from your nondeductible
contributions. (Legislation pending as of this printing clarifies that the next
portion of a distribution is treated as coming from amounts which have been
rolled over from a Regular IRA and are subject to the four-year recognition
treatment described above. Next, amounts are treated as coming from other
rollovers from a Regular IRA. Any remaining amounts are treated as distributed
last.)
35
<PAGE>
Note that to the extent a distribution would be taxable to you, neither you
nor anyone else can qualify for capital gains treatment for amounts distributed
from your account. Similarly, you are not entitled to the special five- or ten-
year averaging rule for lump-sum distributions that may be available to persons
receiving distributions from certain other types of retirement plans. Rather,
the taxable portion of any distribution is taxed to you as ordinary income.
You may be required to indicate on distribution requests whether or not
federal income taxes should be withheld on the taxable portion (if any) of a
distribution from a Roth IRA. Redemption requests not indicating an election not
to have federal income tax withheld will be subject to withholding with respect
to the taxable portion (if any) of a distribution to the extent required under
federal law. (Note that legislation pending as of this printing clarifies that,
for federal tax purposes, Roth IRAs are taxed separately from Regular IRAs, Roth
IRAs with rollovers are taxed separately from Roth IRAs without rollovers, and
Roth IRAs with rollovers with different five-year periods are taxed separately.)
(11) ARE THERE PENALTIES FOR EARLY DISTRIBUTION FROM A ROTH IRA?
If the earnings portion of the distribution from your Roth IRA is taxable,
it may also be subject to a 10% nondeductible penalty tax if it is received
before you reach age 59 1/2 unless (i) the distribution is a return of
nondeductible contributions, (ii) the distribution is made because of your
death, disability, or as part of a series of substantially equal periodic
payments over your life expectancy or the joint life expectancy of you and your
beneficiary, (iii) the distribution is made for medical expenses in excess of
7.5% of adjusted gross income or, subject to various limits, is made for
reimbursement of certain medical premiums while you are unemployed, (iv) the
distribution is made to pay for certain higher education expenses for you, your
spouse, your child, your grandchild, or the child or grandchild of your spouse,
(v) subject to various limits, the distribution is used to purchase a first home
or, in limited cases, a second or subsequent home for you, your spouse, or your
or your spouse's child, grandchild or ancestor, or (vi) the distribution is an
exempt withdrawal of an excess contribution. The penalty tax may also be avoided
if the distribution is rolled over to another Roth IRA.
(12) WHAT IF I ENGAGE IN A PROHIBITED TRANSACTION?
If you engage in a "prohibited transaction," as defined in section 4975 of
the Internal Revenue Code, your account could lose its tax-favored status.
Examples of prohibited transactions are:
(a) the sale, exchange, or leasing of any property between you and your
account,
(b) the lending of money or other extensions of credit between you and
your account,
36
<PAGE>
(c) the furnishing of goods, services, or facilities between you and your
account.
(13) WHAT IF I PLEDGE MY ACCOUNT?
If you use (pledge) all or part of your Roth IRA as security for a loan,
your account may lose its tax-favored status.
(14) HOW ARE CONTRIBUTIONS TO A ROTH IRA REPORTED FOR FEDERAL TAX PURPOSES?
As of the date of this printing, the Internal Revenue Service had not
issued forms for reporting information related to contributions to and
distributions from a Roth IRA.
(15) HOW ARE EARNINGS ON MY ACCOUNT CALCULATED AND ALLOCATED?
The method of computing and allocating annual earnings is set forth in the
Roth Individual Retirement Account Custodial Agreement. The growth in value of
your IRA is neither guaranteed nor projected.
(16) IS THERE ANYTHING ELSE I SHOULD KNOW?
Your Roth Individual Retirement Account Plan has been approved as to form
by the Internal Revenue Service. The Internal Revenue Service approval
is a determination only as to the form of the Plan and does not represent a
determination of the merits of the Plan as adopted by you. You may obtain
further information with respect to your Roth Individual Retirement Account from
any district office of the Internal Revenue Service. The statute provides that
Roth IRAs are to be treated the same as Regular IRAs for most purposes. As the
IRS clarifies its interpretation of the statute, revised or updated information
will be provided.
37
<PAGE>
FORM 5305-RA
(REV. JANUARY 1, 1998)
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
SKYLINE FUNDS INDIVIDUAL RETIREMENT
CUSTODIAL ACCOUNT
(Under Section 408(a) of the Internal Revenue Code)
(January 1, 1998)
ARTICLE I
1. If this Roth IRA is not designated as a Roth Conversion IRA, then, except
in the case of a rollover contribution described in section 408A(e), the
Custodian will accept only cash contributions and only up to a maximum amount of
$2,000 for any tax year of the Depositor.
2. If this Roth IRA is designated as a Roth Conversion IRA, no contributions
other than IRA Conversion Contributions made during the same tax year will be
accepted.
ARTICLE II
The $2,000 limit described in Article I is gradually reduced to $0 between
certain levels of adjusted gross income (AGI). For a single Depositor, the
$2,000 annual contribution is phased out between AGI of $95,000 and $110,000;
for a married Depositor who files jointly, between AGI of $150,000 and $160,000;
and for a married Depositor who files separately, between $0 and $10,000. In the
case of a conversion, the Custodian will not accept IRA Conversion Contributions
in a tax year if the Depositor's AGI for that tax year exceeds $100,000 or if
the Depositor is married and files a separate return. Adjusted gross income is
defined in section 408A(c)(3) and does not include IRA Conversion Contributions.
ARTICLE III
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE IV
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning
of section 408(a)(5)).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m)) except as otherwise permitted by section 408(m)(3),
which provides an exception for certain gold, silver, and platinum coins, coins
issued under the laws of any state, and certain bullion.
38
<PAGE>
ARTICLE V
1. If the Depositor dies before his or her entire interest is distributed
to him or her and the grantor's surviving spouse is not the sole beneficiary,
the entire remaining interest will, at the election of the Depositor or, if
the Depositor has not so elected, at the election of the beneficiary or
beneficiaries, either:
(a) Be distributed by December 31 of the year containing the fifth anniversary
of the Depositor's death, or
(b) Be distributed over the life expectancy of the designated beneficiary
starting no later than December 31 of the year following the year of the
Depositor's death.
If distributions do not begin by the date described in (b), distribution
method (a) will apply.
2. In the case of a distribution method 1.(b) above, to determine the minimum
annual payment for each year, divide the grantor's entire interest in the trust
as of the close of business on December 31 of the preceding year by the life
expectancy of the designated beneficiary using the attained age of the
designated beneficiary as of the beneficiary's birthday in the year
distributions are required to commence and subtract 1 for each subsequent year.
3. If the Depositor's spouse is the sole beneficiary on the Depositor's date
of death, such spouse will then be treated as the Depositor.
ARTICLE VI
1. The Depositor agrees to provide the Custodian with information necessary
for the Custodian to prepare any reports required under sections 408(i) and
408A(d)(3)(E), and Regulations sections 1.408-5 and 1.408-6, and under guidance
published by the Internal Revenue Service.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor prescribed by the Internal Revenue Service.
ARTICLE VII
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through IV and this sentence will be controlling. Any
additional articles that are not consistent with section 408A, the related
regulations, and other published guidance will be invalid.
ARTICLE VIII
This agreement will be amended from time to time to comply with the provisions
of the Code, related regulations, and other published guidance. Other amendments
may be made with the consent of the persons whose signatures appear below.
39
<PAGE>
ARTICLE IX
1. DEFINITIONS.
"Investment Company" shall mean an investment company as defined in Internal
Revenue Code Section 851(a), shares of which Skyline Funds has agreed to offer
for investment under this Account. "Investment Company Shares" or "Shares" shall
mean shares of beneficial interest or capital stock of the Investment Company.
2. INVESTMENT OF ACCOUNT ASSETS.
(a) Each contribution forwarded by the Depositor to the Custodian shall
identify the Depositor's account number and be accompanied by a statement signed
by the Depositor identifying the Investment Company Shares in which that
contribution is to be invested. The Custodian may return to the Depositor,
without liability for interest thereon, any contributions which are not
accompanied by adequate account identification or an appropriate signed
statement directing investment
of those contributions.
(b) Contributions shall be invested in whole and fractional Investment Company
Shares at the price and in the manner in which such shares are then being
publicly offered by the Investment Company. All distributions received on
Investment Company Shares held in the Custodial Account shall be reinvested in
like Shares and credited to such Account. If any distribution of Investment
Company Shares may be received at the election of the shareholder in additional
like Shares or in cash or other property, the Custodian shall elect to receive
such distribution in additional like Investment Company Shares.
(c) All Investment Company Shares acquired by the Custodian shall be registered
in the name of the Custodian or its registered nominee. The Depositor shall be
the beneficial owner of all Investment Company Shares held in the Custodial
Account and the Custodian shall not vote any of such shares, except upon written
direction of the Depositor. The Custodian agrees to forward to every Depositor a
then current Prospectus, reports, notices, proxies and related proxy soliciting
materials applicable to Investment Company Shares received by the Custodian.
(d) The Depositor may at any time, by a manually signed direction delivered to
the Custodian, redeem any number of Investment Company Shares held for his
account and reinvest the proceeds in the Shares of any other Investment Company.
Telephone redemptions and reinvestments shall be done at the price and in the
manner in which such Shares are then being redeemed or offered by the respective
Investment Companies.
3. AMENDMENT AND TERMINATION.
(a) Skyline Funds may, with the written approval of the Custodian, amend the
Custodial Account in whole or in part (including retroactive amendments) by
delivering to the Depositor written notice of such amendment setting forth the
40
<PAGE>
substance and effective date of the amendment. The Depositor shall be deemed to
have consented to any such amendments not objected to in writing by the
Depositor within thirty (30) days of receipt of the notice, provided that no
amendment shall cause or permit any part of the assets of the Custodial Account
to be diverted to purposes other than for the exclusive benefit of the Depositor
or his beneficiaries, nor shall any amendment be made except in accordance with
the applicable law and regulations affecting this Custodial Account.
(b) The Depositor may at any time terminate the Custodial Account by delivering
to the Custodian a written notice of such termination setting forth the
effective date thereof, together with any required withholding information.
(c) The Custodial Account created by this Agreement shall automatically
terminate upon distribution to the Depositor or the beneficiary designated under
Paragraph 6 of Article IX hereof of the entire balance in the Custodial Account.
(d) Skyline Funds may remove the Custodian at any time upon thirty (30) days
written notice to the Custodian and the Depositor, and may appoint a successor
custodian at any time. The Custodian may elect to terminate the Custodial
Account upon thirty (30) days written notice to the Depositor.
(e) In the event that the assets of any Investment Company in which the
Custodial Account is invested are transferred to or acquired by any other
investment company or other commingled investment fund which is a permissible
investment for an individual retirement account, by merger or otherwise, the
Custodian may make such amendments to this Agreement, or take such other action,
as it may determine to be necessary or appropriate to accomplish such
transaction and the exchange of Investment Company Shares for shares or other
appropriate units of ownership in such successor fund. The consent of the
Depositor shall not be required for any such amendment or action, but the
Depositor shall be promptly notified thereof, and shall have the right to
withdraw the funds in the Custodial Account without fee, charge, load or penalty
of any kind.
4. TAXES AND CUSTODIAL FEES. Any income taxes or other taxes of any kind
whatsoever that may be levied or assessed upon or in respect of the assets of
the Custodial Account, or the income arising therefrom, any transfer taxes
incurred, all other administrative expenses incurred by the Custodian in the
performance of its duties, including fees for legal services rendered to the
Custodian, and the Custodian's compensation, shall be paid from the Custodial
Account. Unusual administrative responsibilities not contemplated by the fee
schedule will result in such additional charges as will reasonably compensate
the Custodian for the services performed.
The Custodian fee listed in the fee schedule will be deducted by the Custodian
from the initial contribution received from the Depositor. The annual
maintenance fee will be deducted on the last business day in September for each
year and enough fund shares will be redeemed to cover this fee. Fees as listed
on the fee
41
<PAGE>
schedule will be deducted from the refund or redemption proceeds at the time
of distribution or redemption and the remaining balance will be remitted to the
Depositor in the case of distribution, or will be reinvested in accordance with
the Depositor's instructions.
5. REPORTS AND NOTICES.
(a) The Custodian shall keep adequate records of transactions it is required to
perform hereunder. No later than sixty (60) days after the close of each
calendar year, or after the Custodian's resignation or removal pursuant to
Article IX, Paragraph 3, the Custodian shall render to Depositor a written
report or reports reflecting the transactions effected by it during such period
and the assets and liabilities of the Custodial Account at the close of the
period.
(b) All communications or notices required or permitted to be given herein
shall be deemed to be given upon receipt by the Custodian at P.O. Box 701,
Milwaukee, Wisconsin 53201-0701, the Investment Company and Skyline Funds at
P.O. Box 701, Milwaukee, Wisconsin 53201-0701, or the Depositor at his most
recent address shown in the Custodian's records. The Depositor agrees to advise
the Custodian promptly, in writing, of any change of address.
6. DESIGNATION OF BENEFICIARY. The Depositor shall have the right, by written
notice to the Custodian, to designate a beneficiary or beneficiaries, primary
and contingent, to receive any benefit to which such Depositor may be entitled
in the event of his death prior to the complete distribution of such benefit. In
the event the Depositor has not designated any beneficiaries, or if all
beneficiaries shall predecease the Depositor, the following persons shall take
in the order named:
(a) Spouse of the Depositor;
(b) If the spouse shall predecease the Depositor, then in equal shares to any
children surviving the Depositor and to the descendants then living of a
deceased child, by the right of representation, or
(c) If the Depositor shall leave neither spouse nor descendants surviving, then
to the personal representative of the Depositor's estate.
The determination of the Custodian as to the person entitled to receive any
distribution from the Custodial Account following the death of the Depositor, if
made in good faith, shall be conclusive and binding on all persons claiming an
interest in the Depository Account; provided that nothing provided herein shall
be construed to preclude the Custodian from filing an action in the nature of
interpleader or other appropriate proceeding in a court of competent
jurisdiction to determine the person entitled to receive such distribution. Any
expenses incurred by the Custodian in determining the person entitled to receive
a distribution from the Custodial Account, including without limitation
attorneys fees in any such action, shall be reimbursed from the Custodial
Account.
42
<PAGE>
7. INALIENABILITY OF BENEFITS. The benefits provided hereunder shall not be
subject to alienation, assignment, garnishment, attachment, execution or levy of
any kind of any attempt to cause such benefits to be so subjected shall not be
recognized except to the extent as may be required by law.
8. ROLLOVER CONTRIBUTIONS. The Custodian may receive rollover contributions as
described in section 408A(e) of the Code, and regulations promulgated
thereunder, subject to Article I. If any property is transferred to the
Custodian as a rollover contribution, such property shall be sold by the
Custodian and the proceeds reinvested as provided in section 2 of this Article
IX. The Custodian reserves the right to refuse to accept any contributions which
are not in the form of cash.
9. CONFLICT IN PROVISIONS. To the extent that any of the provisions of Article
IX shall conflict with the provisions of Articles V, VI, or VIII, the provisions
of Article IX shall prevail.
10. STATUS OF DEPOSITORS. Neither the Depositor nor any other person shall have
any legal or equitable right against the Custodian or the Investment Company
except as provided herein. The Depositor agrees to indemnify and hold the
Custodian harmless from and against any liability that the Custodian may incur
in the administration of the Account unless arising from the Custodian's own
negligence or misconduct.
11. LOSS OF EXEMPTION. If the Custodian receives notice that the Depositor's
Account has lost its tax-exempt status under section 408A of the Code for any
reason, including by reason of a transaction prohibited by section 4975 of the
Code, the Custodian shall distribute to the Depositor the entire balance in the
Account, in cash or in kind, in the sole discretion of the Custodian no later
than 90 days after the date the Custodian receives such notice.
12. APPLICABLE STATE LAW. This Custodial Account shall be construed,
administered and enforced according to the laws of the State of Wisconsin except
to the extent Federal law supersedes Wisconsin law.
13. DISTRIBUTIONS TO SURVIVING SPOUSE. If distributions from the Custodial
Account are to be made to the Depositor's surviving spouse, or to a trust of
which the Depositor's surviving spouse is the income beneficiary, the amount
which the surviving spouse (or such trust) is entitled to receive in each year
shall not be less than the income of the Custodial Account (or of the portion of
the Custodial Account with respect to which the surviving spouse or such trust
is the beneficiary) for such year, as determined under section 2056(b)(7) of the
Code.
14. MINIMUM DISTRIBUTIONS; ELECTION NOT TO RECALCULATE LIFE EXPECTANCIES. The
following provisions supplement the provisions of Article V with respect to
minimum required distributions to a beneficiary following the death of the
Depositor, and shall control over the provisions of Article V in the event of
any inconsistency. All paragraph references in this paragraph 14 are to
paragraphs of Article V unless otherwise provided.
43
<PAGE>
(a) A beneficiary shall be deemed to have elected the method described in
paragraph 1(b) if either he withdraws the minimum amount required for the first
year under the method described in paragraph 1(b) and does not specifically
elect the method described in paragraph 1(a) by the end of such year, or if the
date specified in paragraph 1(a) occurs first and he has not withdrawn the
entire balance in the Custodial Account by that time; otherwise, the beneficiary
shall be deemed to have elected the method described in paragraph 1(a).
(b) If there is more than one beneficiary entitled to receive distributions on
equal priority upon the death of the Depositor or a prior beneficiary then, to
the extent permitted by Proposed Regulations section 1.401(a)(9)-1, Q&A H-2, and
subject to such requirements and limitations as the Custodian may establish, the
Custodial Account may be divided into separate accounts for purposes of Article
V and this paragraph.
(c) Notwithstanding the references to "equal or substantially equal" payments,
if a beneficiary is receiving distributions under paragraph 1(b), he may
withdraw amounts that exceed the minimum amount required by paragraph 2 in any
year, provided that any excess shall not be credited against the minimum amount
required to be withdrawn in subsequent years. Withdrawals may also be made at
irregular intervals, provided that the minimum amount required for each year
shall be withdrawn by the last day of such year.
(d) Notwithstanding paragraph (3), a surviving spouse of a deceased Depositor
may elect not to be treated as the Depositor, but instead to be subject to
paragraph 1, in which event the required starting date for the method provided
in paragraph 1(b) shall be the later of the date specified therein or December
31 of the year in which the Depositor would have attained the age of 70 1/2. In
addition, a surviving spouse may, in lieu of the method specified in paragraph
2, elect to have his or her life expectancy determined each year on the basis of
his or her age attained in such year. All elections described in this paragraph
14(d) shall be made in writing referring explicitly to this paragraph 14(d) and
in accordance with procedures established by the Custodian and the Proposed
Regulations or successors thereto. Such elections must be made and, if made,
shall be irrevocable after the date upon which distributions are required to
commence under paragraph 1.
(e) All references to the Proposed Regulations section 1.401(a)(9)-1 contained
in Article V and this paragraph 14 include the applicable provisions of Proposed
Regulations section 1.408-8 applying such Proposed Regulations to individual
retirement accounts, any subsequent amendments to any such Proposed Regulations,
and the applicable provisions of the permanent Regulations, when issued, all of
which are incorporated by reference and shall control over any contrary
provision of this Agreement. Reference to specific provisions of the Proposed
Regulations shall not be construed to limit reference to other provisions where
appropriate in the interpretation of Article V and this paragraph 14.
44
<PAGE>
(f) Distributions will be made only upon the request of the Depositor (or the
Depositor's authorized agent, beneficiary, executor, or administrator), in such
form and manner as is acceptable to the Custodian. For such distributions, life
expectancy and joint-life and last-survivor expectancy are calculated based on
information provided by the Depositor (or the Depositor's authorized agent,
beneficiary, executor, or administrator) using the expected return multiples
under Treasury Regulations Section 1.72-9. The Custodian will not be liable for
errors in such calculations resulting from its reliance on such information. If
any assets held on the Depositor's behalf in a Custodial Account are transferred
directly to a trustee or Custodian of another individual retirement account
described in Code Section 408A established for the Depositor, it shall be the
Depositor's responsibility to ensure that any required minimum distribution
required by Article V is made prior to giving the Custodian such transfer
instructions.
45
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
46
<PAGE>
For 24-hour account information and prices call: 1.800.828.2SKY
To speak with a Skyline Funds Representative
during normal business hours, or for a prospectus which
details expenses, call: 1.800.458.5222
Distributor: Funds Distributor Inc.
[LOGO]
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
01/98
<PAGE>
[LOGO]
THIS APPLICATION IS TO:
/ / Establish a new account
/ / Change an existing account
_________________________________________
Skyline Funds Account Number
MAILING INSTRUCTIONS
Regular Delivery:
Mutual Fund Services
Attn: Skyline Funds
Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
Overnight Express:
Mutual Fund Services
Attn: Skyline Funds
Firstar Trust Company
615 E. Michigan Street, Third Floor
Milwaukee, WI 53202-5207
IF YOU HAVE ANY QUESTIONS, PLEASE CALL SKYLINE FUNDS AT 800-458-5222.
IRA PARTICIPANT
________________________________________________________________________________
FIRST NAME MIDDLE INITIAL LAST NAME
________________________________________________________________________________
DATE OF BIRTH SOCIAL SECURITY NUMBER
________________________________________________________________________________
ADDRESS
________________________________________________________________________________
CITY/STATE/ZIP
(___________)________________________________(___________)______________________
DAYTIME PHONE EVENING PHONE
CONTRIBUTION TYPE
Contribution is for tax year_______________.
CONTRIBUTION WILL BE FOR THE CURRENT YEAR UNLESS OTHERWISE NOTED. IF PRIOR YEAR,
MUST BE MAILED ON OR BEFORE APRIL 15TH.
Please select one:
/ / Regular IRA (maximum $2,000).
/ / Roth IRA (maximum $2,000).
/ / SEP-IRA. An application must be completed for each employee, and the
employer must complete Form 5305 SEP.
/ / Conversion or partial rollover of an existing Skyline Funds IRA to a
Roth IRA.
Account Number of existing IRA ________________________
Amount to be converted $ ________________________
/ / Transfer of Assets to Regular IRA. A transfer form must be completed.
/ / Transfer of Assets to Roth IRA. A transfer form must be completed.
/ / 60-Day Rollover (check type)
/ / Employer plan (or IRA funded entirely by rollover from employer
plan) to Regular IRA
/ / 403(b) plan (or IRA funded entirely by rollover from 403(b)
plan) to Regular IRA
/ / Other Regular or SEP-IRA to Regular IRA
/ / Regular or SEP-IRA to Roth IRA
/ / Roth IRA to Roth IRA
/ / Other __________________________________________
DO NOT USE THIS FORM FOR A SIMPLE-IRA. PLEASE CONTACT SKYLINE FOR THE
CORRECT FORM.
IRA APPLICATION
Fee Schedule: (Fees are subject to change by the Custodian upon notice to the
depositor.)
Annual maintenance fee per account (or $25 for two or more accounts) . .$12.50
Transfer to successor trustee. . . . . . . . . . . . . . . . . . . . . .$15.00
Distribution to a participant. . . . . . . . . . . . . . . . . . . . . .$15.00
Refund of excess contribution. . . . . . . . . . . . . . . . . . . . . .$15.00
Annual distribution. . . . . . . . . . . . . . . . . . . . . . . . . . .$15.00
Any outgoing wire. . . . . . . . . . . . . . . . . . . . . . . . . . . .$12.00
INVESTMENT OF CONTRIBUTIONS
You must select a Fund. Make check payable to the Fund in which you are
investing. Minimum initial investment is $1,000.
Contribution amount of $ ______________________
$1,000 MINIMUM
SKYLINE FUNDS
/ / Special Equities Portfolio (014) (CLOSED TO NEW INVESTORS)
/ / Small Cap Value Plus (020)
/ / Small Cap Contrarian (024)
SKYLINE-FIRSTAR MONEY MARKET FUND
/ / Money Market Fund (022)
/ / U.S. Government Money Market Fund (023)
PRIMARY BENEFICIARY DESIGNATION
________________________________________________________________________________
FIRST NAME MIDDLE INITIAL LAST NAME
________________________________________________________________________________
DATE OF BIRTH SOCIAL SECURITY NUMBER
________________________________________________________________________________
ADDRESS
________________________________________________________________________________
CITY/STATE/ZIP
(___________)________________________________(___________)______________________
DAYTIME PHONE EVENING PHONE
IF YOU NAME A TRUST AS YOUR BENEFICIARY, YOU MUST PROVIDE A COPY OF THE TRUST.
SECONDARY BENEFICIARY DESIGNATION
________________________________________________________________________________
FIRST NAME MIDDLE INITIAL LAST NAME
________________________________________________________________________________
DATE OF BIRTH SOCIAL SECURITY NUMBER
________________________________________________________________________________
ADDRESS
________________________________________________________________________________
CITY/STATE/ZIP
(___________)________________________________(___________)______________________
DAYTIME PHONE EVENING PHONE
IF YOU NAME A TRUST AS YOUR BENEFICIARY, YOU MUST PROVIDE A COPY OF THE TRUST.
EXCHANGE PRIVILEGE
Exchange privilege is AUTOMATIC unless checked below. Exchanges may only be
made to identically registered accounts. (The Funds reserve the right to record
all exchange requests and the exchange privilege may be changed or withdrawn by
the Funds at any time.)
/ / I DO NOT AUTHORIZE TELEPHONE EXCHANGES.
<PAGE>
AUTOMATIC INVESTMENT PLAN
ATTACH VOIDED CHECK OR WITHDRAWAL SLIP HERE
You can purchase shares regularly by requesting electronic transfer of money
from your checking, NOW or savings account to your Skyline Funds account.
Investments will be made on the 5th, or 15th, or 25th of
the month, or the following business day.
GUIDELINES
- - Your bank must be a member of the Automated Clearing House (ACH).
- - If the transfer is from a checking account, THIS APPLICATION MUST BE
ACCOMPANIED BY A VOIDED CHECK.
- - If the transfer is from a savings account, THIS APPLICATION MUST BE
ACCOMPANIED BY A WITHDRAWAL SLIP including your financial institution's
nine digit routing number.
- - Please allow 15 business days prior to the next transaction.
- - Your Skyline Funds account must be established with a $1,000 minimum
balance before your first scheduled investment under the Plan goes into
effect.
- - The minimum monthly investment under the Plan is $50.
- - If an automatic purchase cannot be made due to insufficient funds or any
other reason, a $20 service fee will be assessed.
- - The Plan will be terminated upon redemption, including redemption by
exchange, of all shares.
- - Termination or changes MUST BE IN WRITING to Firstar Trust Company.
Regular investments made on / / 5th, or / / 15th, or / / 25th
of $ ___________________________________
$50 MINIMUM
Please note the maximum annual contribution allowed for an individual IRA is
$2,000.
/ / Checking or NOW Account / / Savings Account
___________________________________________________________________________
CHECKING/NOW OR SAVINGS ACCOUNT NUMBER
___________________________________________________________________________
NAME(S) ON ACCOUNT
___________________________________________________________________________
NAME OF BANK (MUST BE A MEMBER OF AUTOMATED CLEARING HOUSE - ACH)
___________________________________________________________________________
BANK ADDRESS
___________________________________________________________________________
CITY/STATE/ZIP
___________________________________________________________________________
SIGNATURE OF JOINT OWNER OF ACCOUNT (IF ANY)
I (we) authorize you via the ACH Network to honor all debit entries initiated by
me (us) from time to time through Mellon Bank on behalf of Firstar Trust
Company. All such debits are subject to sufficient collected funds in my (our)
account to pay the debit when presented. I (we) agree that your treatment of
each entry, and your rights to respect it, shall be the same as if it were
signed personally by me (or either of us). I (we) further agree that if any
such entries are dishonored with good and sufficient cause, you shall be under
no liability whatsoever.
SHAREHOLDER AUTHORIZATION
Under penalties of perjury, the undersigned hereby certifies (1) that the Social
Security Number given is correct and (2) that the account owner is not subject
to backup withholding because (a) the undersigned has not been notified of being
subject to backup withholding as a result of a failure to report all interest or
dividend, or (b) the IRS has provided notification that the account owner is no
longer subject to backup withholding. (Cross out (2) if it is not correct.)
The IRS does not require your consent to any provision of this document except
the certifications in this paragraph required to avoid backup withholding.
I certify that I am of legal age and have received and read the prospectus and
agree to its terms. In accordance with the terms and conditions set forth in
this form, the current prospectus I have received, and the instructions above,
please establish a shareholder account for me in accordance with the
instructions on this application. APPLICATIONS WHICH ARE NOT FULLY COMPLETED
MAY BE REJECTED. This application may be used to open a new IRAaccount or to
revise an existing account.
I understand that the Exchange Privilege will apply to my account unless I have
specifically declined the privilege. I understand that by signing this
application, unless the Privilege is declined, I agree that neither the Funds
nor their Transfer Agent, their agents, officers, trustees, or employees will be
liable for any loss, liability, cost or expense for acting on instructions given
under the Privilege, placing the risk of any loss on me. See "How to Redeem
Shares -- By Exchange" in the prospectus.
I hereby adopt either the Skyline Funds Regular Individual Retirement Custodial
Account Agreement or the Skyline Funds Roth Individual Retirement Custodial
Account Agreement, of applicable, and agree to be bound by all terms there of.
/ / SELECT ONLY IF YOU ARE PARTICIPATING IN THE AUTOMATIC INVESTMENT PLAN
I have read and understand the guidelines for the Skyline Funds
Automatic Investment Plan. I also understand that the Plan may
be terminated or modified at any time without notice by Skyline
Funds or Firstar Trust Company.
________________________________________________________________________
SIGNATURE DATE
DUPLICATE STATEMENT
_______________________________________ __________________________________
INVESTMENT ADVISOR# RR#
_______________________________________ __________________________________
FIRM NAME ADVISOR NAME
_______________________________________________________________________________
ADDRESS
_______________________________________________________________________________
CITY/STATE/ZIP
(___________)__________________________ (___________)_____________________
PHONE FAX
_______________________________________________________________________________
AUTHORIZED SIGNATURE
Are you a broker dealer? / / Yes / / No
If yes, please provide broker dealer
name ______________________________________________
Distributor: Funds Distributor, Inc. 5/98
<PAGE>
[LOGO]
IRA TRANSFER FORM/
DIRECT ROLLOVER FORM
Complete this form to transfer an existing IRA or plan balance to a Skyline
Funds IRA.
MAILING INSTRUCTIONS
Regular Delivery:
Mutual Fund Services
Attn: Skyline Funds
Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
Overnight Express:
Mutual Fund Services
Attn: Skyline Funds
Firstar Trust Company
615 E. Michigan Street, Third Floor
Milwaukee, WI 53202-5207
IF YOU HAVE ANY QUESTIONS, PLEASE CALL SKYLINE FUNDS AT 800-458-5222.
TO: PRESENT CUSTODIAN/TRUSTEE
COMPLETED BY SKYLINE IRA INVESTOR
______________________________________________________________________
NAME OF PRESENT CUSTODIAN/TRUSTEE
______________________________________________________________________
MUTUAL FUND (IF APPLICABLE)
______________________________________________________________________
ACCOUNT NUMBER
______________________________________________________________________
ADDRESS
______________________________________________________________________
CITY/STATE/ZIP
(____)_____________________________(____)_____________________________
DAYTIME PHONE EVENING
ROLLOVER IRA ASSETS ROLLING OVER FROM:
/ / Qualified employer plan or IRA derived from a rollover from such a plan
/ / Other type of Regular IRA, SEP-IRA or SIMPLE-IRA (NOTE: certain
distributions from a SIMPLE-IRA can only be rolled into another SIMPLE-IRA)
/ / Tax-sheltered annuity (403 (b)) plan or IRA derived from a rollover from
such a plan
/ / Roth IRA (NOTE: can only be rolled into another Roth IRA.)
I have established an account under the Skyline Funds Individual Retirement
Account. Please transfer the assets, cash only, indicated below to Firstar
Trust Company as successor custodian.
/ / All assets
/ / $______________________________________________________________only
/ / At maturity date of _______________________________________________
/ / Immediately (I am aware of any penalties)
ACCEPTANCE
Custodian Authorization: Firstar Trust Company hereby accepts its appointment
as Custodian of the above IRA account and upon receipt of assets, will deposit
such assets in a Skyline Funds IRA on behalf of the Depositor authorizing this
transfer or direct rollover.
TO: FIRSTAR TRUST COMPANY
COMPLETED BY SKYLINE IRA INVESTOR
______________________________________________________________________
FIRST NAME MIDDLE INITIAL LAST NAME
______________________________________________________________________
SOCIAL SECURITY NUMBER
______________________________________________________________________
ADDRESS
______________________________________________________________________
CITY/STATE/ZIP
(____)____________________________(____)______________________________
DAYTIME PHONE EVENING
______________________________________________________________________
SIGNATURE DATE
THE ASSETS RECEIVED ARE TO BE INVESTED IN:
/ / MY EXISTING SKYLINE IRA
_________________________________________________________________
PORTFOLIO NAME
_________________________________________________________________
ACCOUNT NUMBER
/ / MY NEW SKYLINE IRA
A signed Skyline Funds IRA Application must be completed and returned with
this Skyline Funds IRA Transfer Form.
SKYLINE FUNDS
/ / Special Equities Portfolio (014) (CLOSED TO NEW INVESTORS)
/ / Small Cap Value Plus (020)
/ / Small Cap Contrarian (024)
SKYLINE-FIRSTAR MONEY MARKET FUND
/ / Money Market Fund (022)
/ / U.S. Government Money Market Fund (023)
Distributor: Funds Distributor, Inc. 5/98
<PAGE>
[LOGO]
<PAGE>
[LOGO]
SKYLINE FUNDS
APPLICATION
- --------------------------------------------------------------------------------
THIS APPLICATION IS TO:
/ / Establish a new account
/ / Change an existing account
- --------------------------------------------------------------------------------
SKYLINE FUNDS ACCOUNT NUMBER
- --------------------------------------------------------------------------------
MAILING INSTRUCTIONS
- --------------------------------------------------------------------------------
Regular Delivery:
Mutual Fund Services
Attn: Skyline Funds
Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
Overnight Express:
Mutual Fund Services
Attn: Skyline Funds
Firstar Trust Company
615 E. Michigan Street, Third Floor
Milwaukee, WI 53202-5207
IF YOU HAVE ANY QUESTIONS, PLEASE CALL SKYLINE FUNDS AT 800-458-5222.
- --------------------------------------------------------------------------------
ACCOUNT REGISTRATION
- --------------------------------------------------------------------------------
Check type of account and complete all information. Unless otherwise indicated,
each account with multiple owners is deemed to be held in joint tenancy with
right of survivorship except where this form of ownership is not recognized
under applicable local law.
DO NOT USE THIS APPLICATION FOR IRA ACCOUNTS
TAX IDENTIFICATION NUMBER
---------------------------------------------------------------------------
SOCIAL SECURITY NUMBER OR EMPLOYER NUMBER
(USE MINOR'S SOCIAL SECURITY NUMBER FOR TRANSFER/GIFT TO MINORS)
/ / INDIVIDUAL OR JOINT ACCOUNT
---------------------------------------------------------------------------
INDIVIDUAL OWNER'S FULL NAME
---------------------------------------------------------------------------
JOINT TENANT'S FULL NAME
/ / TRANSFER TO A MINOR
as custodian for
-----------------------------------------------------------
CUSTODIAN'S NAME (ONE NAME ONLY)
under the
-----------------------------------------------------------
MINOR'S NAME
Uniform Transfer/Gift to Minors Act
----------------------------------------
STATE
----------------------------------------
MINOR'S DATE OF BIRTH
/ / TRUST OR ORGANIZATION
---------------------------------------------------------------------------
NAME OF TRUST OR ORGANIZATION DATE OF TRUST
---------------------------------------------------------------------------
NAME OF TRUSTEE(S)
Type: / / Trust / / Corporation / / Partnership
/ / Other (please specify)
---------------------------------------
- --------------------------------------------------------------------------------
ADDRESS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDRESS
- --------------------------------------------------------------------------------
CITY/STATE/ZIP
( )
- --------------------------------------------------------------------------------
DAYTIME PHONE
( )
- --------------------------------------------------------------------------------
EVENING PHONE
U.S. Citizen / / Yes / / No
- --------------------------------------------------------------------------------
INITIAL INVESTMENT
- --------------------------------------------------------------------------------
Initial investment by check only. Make check payable to the Fund in which you
are investing. Please be sure to read the prospectus for the Skyline Funds.
Initial investment of $
---------------------------------------------------------
$1,000 MINIMUM
/ / Special Equities Portfolio (014)
/ / Small Cap Value Plus (020)
/ / Skyline Small Cap Contrarian (024)
Skyline-Firstar Money Market Funds
/ / Money Market Fund (022)
/ / U.S. Government Money Market Fund (023)
- --------------------------------------------------------------------------------
DISTRIBUTION OPTION
- --------------------------------------------------------------------------------
Your distributions will be reinvested in additional shares of the Fund unless
the following boxes are checked. Please mail me a check for each:
/ / Dividend / / Capital gain distribution
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Exchange privilege is AUTOMATIC unless checked below. Exchanges may only be
made to identically registered accounts. (Skyline Funds reserve the right to
record all exchange requests and the exchange privilege may be changed or
withdrawn by Skyline at any time.)
/ / I DO NOT AUTHORIZE TELEPHONE EXCHANGES
<PAGE>
ATTACH VOIDED CHECK OR WITHDRAWAL SLIP HERE
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN
- --------------------------------------------------------------------------------
You can purchase shares regularly by requesting electronic transfer of money
from your checking, NOW or savings account to your Skyline Funds account.
Investments will be made on the 5th, or 15th, or 25th of the month, or the
following business day.
GUIDELINES
- - Your bank must be a member of the Automated Clearing House (ACH).
- - If the transfer is from a checking account, THIS APPLICATION MUST BE
ACCOMPANIED BY A VOIDED CHECK.
- - If the transfer is from a savings account, THIS APPLICATION MUST BE
ACCOMPANIED BY A WITHDRAWAL SLIP including your financial institution's
nine digit routing number.
- - Please allow 15 business days prior to the next transaction.
- - Your Skyline Funds account must be established with a $1,000 minimum
balance before your first scheduled investment under the Plan goes into
effect.
- - The minimum monthly investment under the Plan is $50.
- - If an automatic purchase cannot be made due to insufficient funds or any
other reason, a $20 service fee will be assessed.
- - The Plan will be terminated upon redemption, including redemption by
exchange, of all shares.
- - Termination or changes MUST BE IN WRITING to Firstar Trust Company.
Regular investments made on / / 5th, or / / 15th, or / / 25th
of $
---------------------------------------------------------------------------
$50 MINIMUM
/ / Checking or NOW Account / / Savings Account
- --------------------------------------------------------------------------------
CHECKING/NOW OR SAVINGS ACCOUNT NUMBER
- --------------------------------------------------------------------------------
NAME(S) ON ACCOUNT
- --------------------------------------------------------------------------------
NAME OF BANK (MUST BE A MEMBER OF AUTOMATED CLEARING HOUSE - ACH)
- --------------------------------------------------------------------------------
BANK ADDRESS
- --------------------------------------------------------------------------------
CITY/STATE/ZIP
- --------------------------------------------------------------------------------
SIGNATURE OF JOINT OWNER OF ACCOUNT (IF ANY)
I (we) authorize you via the ACH Network to honor all debit entries initiated by
me (us) from time to time through Mellon Bank on behalf of Firstar Trust
Company. All such debits are subject to sufficient collected funds in my (our)
account to pay the debit when presented. I (we) agree that your treatment of
each entry, and your rights to respect it, shall be the same as if it were
signed personally by me (or either of us). I (we) further agree that if any
such entries are dishonored with good and sufficient cause, you shall be under
no liability whatsoever.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTION
- --------------------------------------------------------------------------------
You can redeem shares in your Skyline Funds account by telephone. All
redemption proceeds will be sent to the address below:
/ / Payment to be made to my address of record, or
/ / Payment to my brokerage account listed below, or
/ / Payment to my financial institution listed below
- --------------------------------------------------------------------------------
BANK NAME/ACCOUNT # BANK ABA ROUTING NO.
- --------------------------------------------------------------------------------
BROKERAGE FIRM (if applicable) ACCOUNT NO.
- --------------------------------------------------------------------------------
ADDRESS
- --------------------------------------------------------------------------------
CITY/STATE/ZIP
- --------------------------------------------------------------------------------
DUPLICATE STATEMENT
- --------------------------------------------------------------------------------
- ------------------------------------ -----------------------------------------
INVESTMENT ADVISOR# RR#
- ------------------------------------ -----------------------------------------
FIRM NAME ADVISOR NAME
- --------------------------------------------------------------------------------
ADDRESS
- --------------------------------------------------------------------------------
CITY/STATE/ZIP
( ) ( )
- ------------------------------------ -----------------------------------------
PHONE FAX
- --------------------------------------------------------------------------------
AUTHORIZED SIGNATURE
Are you a broker dealer? / / Yes / / No
If yes, please provide broker dealer name
--------------------------------------
- --------------------------------------------------------------------------------
SHAREHOLDER AUTHORIZATION
- --------------------------------------------------------------------------------
Please establish a shareholder account in accordance with the instructions on
this application. I (we) certify that I am (we are) of legal age and have
received and read the prospectus and agree to its terms. APPLICATIONS WHICH ARE
NOT SIGNED OR FULLY COMPLETED WILL BE REJECTED. This application may be used to
open new account(s) or to revise existing account(s).
I (we) understand that the Exchange Privilege will apply to my (our) account
unless I (we) have specifically declined the privilege. I (we) understand that
by signing this application, unless the Privilege is declined, I (we) agree that
neither the Funds nor their Transfer Agent, agents, officers, trustees, or
employees will be liable for any loss, liability, cost or expense for acting on
instructions given under the Privilege, placing the risk of any loss on me (us).
See "How to Redeem Shares--By Exchange" in the prospectus.
- --------------------------------------------------------------------------------
/ / SELECT ONLY IF YOU ARE PARTICIPATING IN THE AUTOMATIC INVESTMENT PLAN
I (we) have read and understand the guidelines for Skyline Funds
Automatic Investment Plan. I (we) also understand that the Plan may
be terminated or modified at any time without notice by Skyline Funds
or Firstar Trust Company.
- --------------------------------------------------------------------------------
UNDER PENALTIES OF PERJURY, THE UNDERSIGNED HEREBY CERTIFY (1) THAT THE SOCIAL
SECURITY NUMBER GIVEN IS CORRECT AND (2) THAT THE ACCOUNT OWNER(S) IS (ARE) NOT
SUBJECT TO BACKUP WITHHOLDING BECAUSE (A) THE UNDERSIGNED HAVE NOT BEEN NOTIFIED
OF BEING SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT ALL
INTEREST OR DIVIDENDS, OR (B) THE I.R.S. HAS PROVIDED NOTIFICATION THAT THE
ACCOUNT OWNER(S) IS (ARE) NO LONGER SUBJECT TO BACKUP WITHHOLDING. (CROSS OUT
(2) IF IT IS NOT CORRECT.)
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF
THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
- --------------------------------------------------------------------------------
SIGNATURE (OWNER, TRUSTEE) DATE
- --------------------------------------------------------------------------------
SIGNATURE (JOINT OWNER, CO-TRUSTEE) DATE
Distributor: Funds Distributor Inc.
5/98
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 12/31/97
NSAR & AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810308
<NAME> SKYLINE FUNDS
<SERIES>
<NUMBER> 2
<NAME> SKYLINE SPECIAL EQUITIES PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 390,967
<INVESTMENTS-AT-VALUE> 464,975
<RECEIVABLES> 3,462
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 468,437
<PAYABLE-FOR-SECURITIES> 518
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 849
<TOTAL-LIABILITIES> 1,367
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 390,434
<SHARES-COMMON-STOCK> 21,567
<SHARES-COMMON-PRIOR> 12,087
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,628
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 74,008
<NET-ASSETS> 467,070
<DIVIDEND-INCOME> 2,399
<INTEREST-INCOME> 1,367
<OTHER-INCOME> 0
<EXPENSES-NET> 5,217
<NET-INVESTMENT-INCOME> (1,451)
<REALIZED-GAINS-CURRENT> 54,540
<APPREC-INCREASE-CURRENT> 45,751
<NET-CHANGE-FROM-OPS> 98,840
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 54,134
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,852
<NUMBER-OF-SHARES-REDEEMED> 2,856
<SHARES-REINVESTED> 2,484
<NET-CHANGE-IN-ASSETS> 2,475,589
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 3,674
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,196
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,217
<AVERAGE-NET-ASSETS> 353,007
<PER-SHARE-NAV-BEGIN> 18.16
<PER-SHARE-NII> (0.07)
<PER-SHARE-GAIN-APPREC> 6.46
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 2.89
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.66
<EXPENSE-RATIO> 1.48
<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 12/31/97
NSAR & AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810308
<NAME> SKYLINE FUNDS
<SERIES>
<NUMBER> 4
<NAME> SKYLINE SPECIAL EQUITIES II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 146,945
<INVESTMENTS-AT-VALUE> 167,277
<RECEIVABLES> 596
<ASSETS-OTHER> 5
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 167,878
<PAYABLE-FOR-SECURITIES> 1,815
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 376
<TOTAL-LIABILITIES> 2,191
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,121
<SHARES-COMMON-STOCK> 12,998
<SHARES-COMMON-PRIOR> 8,820
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,234
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,332
<NET-ASSETS> 165,687
<DIVIDEND-INCOME> 1,106
<INTEREST-INCOME> 516
<OTHER-INCOME> 0
<EXPENSES-NET> 2,016
<NET-INVESTMENT-INCOME> (394)
<REALIZED-GAINS-CURRENT> 22,856
<APPREC-INCREASE-CURRENT> 7,534
<NET-CHANGE-FROM-OPS> 29,996
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 25,153
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,132
<NUMBER-OF-SHARES-REDEEMED> 6,913
<SHARES-REINVESTED> 1,960
<NET-CHANGE-IN-ASSETS> 60,354
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 3,925
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,995
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,016
<AVERAGE-NET-ASSETS> 133,206
<PER-SHARE-NAV-BEGIN> 11.94
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 3.13
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 2.29
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.75
<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 12/31/97
NSAR & AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000810308
<NAME> SKYLINE FUNDS
<SERIES>
<NUMBER> 6
<NAME> SKYLINE SMALL-CAP CONTRARIAN
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 5,517
<INVESTMENTS-AT-VALUE> 5,528
<RECEIVABLES> 73
<ASSETS-OTHER> 47
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,648
<PAYABLE-FOR-SECURITIES> 845
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50
<TOTAL-LIABILITIES> 895
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,741
<SHARES-COMMON-STOCK> 475
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11
<NET-ASSETS> 4,852
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3
<OTHER-INCOME> 0
<EXPENSES-NET> 4
<NET-INVESTMENT-INCOME> (1)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 11
<NET-CHANGE-FROM-OPS> 10
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 475
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,753
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3
<AVERAGE-NET-ASSETS> 4,280
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 1.71 <F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> Ratio determined on an annualized basis.
</FN>
</TABLE>
