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SKYLINE FUNDS-REGISTERED TRADEMARK-
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SPECIAL EQUITIES PORTFOLIO
PURE NO LOAD
NO 12b-1 FEES
The Securities and Exchange Commission has not approved the Fund's shares as an
investment or determined whether this prospectus is accurate or complete. Any
representation to the contrary is a crime.
PROSPECTUS
MARCH 1, 2000
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TABLE OF CONTENTS
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SKYLINE SPECIAL EQUITIES PORTFOLIO.......................... 1
INVESTMENT OBJECTIVE................................. 1
PRINCIPAL INVESTMENT STRATEGIES...................... 1
RISKS................................................ 1
IS THE FUND RIGHT FOR YOU?........................... 1
HOW THE FUND HAS PERFORMED........................... 2
FEES AND EXPENSES........................................... 3
HOW WE CHOOSE INVESTMENTS................................... 4
THE FUND............................................. 4
SKYLINE'S RESEARCH................................... 5
SKYLINE'S BUY/SELL DISCIPLINE........................ 5
WHO MANAGES THE FUND........................................ 6
THE PORTFOLIO MANAGER................................ 6
THE ADVISER.......................................... 6
RISKS....................................................... 7
HOW WE MANAGE RISK.......................................... 8
TYPES OF ACCOUNTS........................................... 8
INFORMATION ON PURCHASING SHARES............................ 10
TO OPEN A NEW ACCOUNT WITH US........................ 10
TO ADD TO AN EXISTING ACCOUNT........................ 11
RULES THAT APPLY TO ALL SHARE PURCHASES.............. 12
DETERMINING THE SHARE PRICE.......................... 13
INFORMATION ON REDEEMING SHARES............................. 13
RULES THAT APPLY TO ALL SHARE REDEMPTIONS............ 15
SIGNATURE GUARANTEES................................. 17
SHAREHOLDER SERVICES........................................ 17
SHAREHOLDER ACCOUNTS................................. 17
CHANGES TO YOUR ADDRESS.............................. 17
EXCHANGE PLAN........................................ 18
AUTOMATIC INVESTMENT PLAN............................ 18
ELECTRONIC FUNDS PURCHASES........................... 19
SYSTEMATIC WITHDRAWAL PLAN........................... 19
RETIREMENT PLANS..................................... 20
DISTRIBUTIONS AND TAXES..................................... 20
DISTRIBUTION PAYMENT AND REINVESTMENT OPTIONS........ 20
TAXES AND TAX REPORTING.............................. 20
BUYING AND SELLING SHARES CLOSE TO A RECORD DATE..... 21
SHAREHOLDER INQUIRIES....................................... 21
OUR SERVICE PROVIDERS....................................... 21
FINANCIAL HIGHLIGHTS........................................ 21
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SKYLINE SPECIAL EQUITIES PORTFOLIO
INVESTMENT OBJECTIVE
The Fund seeks maximum capital appreciation primarily through investment in
common stocks that its investment adviser considers to be undervalued.
PRINCIPAL INVESTMENT STRATEGIES
Special Equities Portfolio is a small cap value investment. The Fund
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. The Fund emphasizes investments in
small companies whose outstanding shares have an aggregate market value of less
than $2 billion.
RISKS
Your investment in the Fund is subject to market risk--the risk that a
particular stock, or stocks in general, may fall in value. If the stocks owned
by the Fund fall in value, your investment in the Fund would also fall in value.
Stocks tend to have periods of rising prices and periods of falling prices, and
you could lose money on your investment.
In the short-term, stock prices fluctuate widely in response to company,
market or economic news. Compared to large companies, small companies like those
in which the Fund invests often have a shorter history of operations or a
narrower product line, and may have a harder time raising additional capital
when they need it. As a result, the stock prices of small companies tend to move
more abruptly than stocks of large companies. There are also risks of investing
in value-oriented stocks, including the risk that value-oriented stocks will
underperform growth-oriented stocks during some periods.
IS THE FUND RIGHT FOR YOU?
The Fund is designed for shareholders who are long-term investors, who can
accept more risk and volatility than the general stock market, and who are
willing to accept fluctuations in share price.
This Fund is not appropriate for shareholders who need regular income, have a
short-term investment horizon, or who are unwilling to accept fluctuation in
share price or possible losses.
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HOW THE FUND HAS PERFORMED
The bar chart and table that follow are intended to help you assess the
variability of the Fund's returns over the periods indicated. Returns include
the reinvestment of dividends and distributions. Of course, past performance
does not guarantee 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 following chart shows the annual performance of the Fund during the past
ten years:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
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Annual Total Returns (%)
1990 -9.3
1991 47.4
1992 42.5
1993 22.9
1994 -1.2
1995 13.8
1996 30.4
1997 35.4
1998 -7.2
1999 -13.3
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During the 10 years ended December 31, 1999, the Fund's highest and lowest
quarterly returns were:
- Highest quarterly return: 27.81%, during the quarter ended
March 31, 1991
- Lowest quarterly return: -20.54%, during the quarter ended
September 30, 1990
The table on the following page shows how the Fund's average annual
performance for the one, five, and ten year periods ended December 31, 1999, and
since the Fund's inception on April 23, 1987 compares with broad measures of
market performance.
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Average Annual Total Returns for Periods Ended
December 31, 1999 (%)
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Since
Inception
1 Year 5 Years 10 Years April 23, 1987
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Fund................. -13.28 10.10 14.10 13.53
Russell 2000 Value*.. -1.49 13.14 12.46 10.88**
Russell 2000*........ 21.26 16.69 13.40 11.23
S&P 500*............. 21.14 28.66 18.25 16.83
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* The Russell 2000 Value Index is an unmanaged, value-oriented index comprised
of small stocks that have relatively low price to book ratios. 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.
** Return is calculated from an inception date of 5/1/87.
FEES AND EXPENSES
This Fund is a "no-load" fund. You do not pay any sales charge when you
purchase or sell your shares. However, you will indirectly pay various other
expenses because the Fund pays fees and other expenses that reduce the return on
your investment. The following table describes the fees and expenses that you
may pay if you invest in shares of the Fund.
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Special Equities Portfolio
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SHAREHOLDER TRANSACTION EXPENSES
(paid directly from your investment)
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Maximum sales charge........................................ None
Deferred sales charge....................................... None
Exchange fee................................................ None
Redemption fee.............................................. None
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ANNUAL FUND OPERATING EXPENSES
(deducted from Fund assets)
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Comprehensive Management Fee (including most operating
expenses)*................................................ 1.47%
Distribution (12b-1) Fees................................... None
Other Expenses.............................................. .01%
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Total Annual Fund Operating Expenses........................ 1.48%
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* Under the Advisory Agreement, Skyline Asset Management, L.P. ("Adviser") pays
all of the ordinary operating expenses of the Fund, except the fees and
expenses of the Fund's non-interested trustees. (See "Who Manages the
Fund--THE ADVISER.")
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The following Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Your actual returns and costs may be higher or lower.
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1 year..................................... $ 151
3 years.................................... 468
5 years.................................... 808
10 years................................... 1,768
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THE EXAMPLE IS FOR ILLUSTRATION ONLY. IT IS NOT MEANT TO SUGGEST THE FUND'S
ACTUAL OR EXPECTED COSTS OR EXPENSES, WHICH MAY BE MORE OR LESS THAN THE AMOUNTS
SHOWN.
HOW WE CHOOSE INVESTMENTS
THE FUND
The Fund seeks maximum capital appreciation primarily through investment in
common stocks that the Fund's investment adviser, Skyline Asset Management, L.P.
(called the "Adviser" in this Prospectus), considers to be undervalued.
Companies in which the Fund 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.
The Fund emphasizes investments in small companies whose outstanding shares
have an aggregate market value of less than $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. The Fund may, from time to time, take a temporary defensive position
that is inconsistent with its principal
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investment strategies. When the Adviser believes a temporary defensive position
is necessary, the Fund may invest in high-quality fixed-income securities or
hold assets in cash or cash equivalents. Taking a defensive position might
prevent the Fund from achieving its investment objective.
SKYLINE'S RESEARCH
When looking for investment ideas for the Fund, the Adviser's investment
staff, comprised of all the analysts and the portfolio manager (the "investment
staff"), relies on a number of sources, both internal and external. For example,
the investment staff meets with hundreds of companies annually, works with more
than 100 brokerage firms (including small regional firms), and uses
sophisticated computer screens to help focus on companies that meet the Fund's
investment criteria.
The investment staff screens stocks for the Fund using:
- valuation measures, including price to earnings, price to book,
price to cash flow, and price to sales ratios;
- earnings growth prospects;
- a small capitalization range; and
- a bottom up approach--one stock at a time, without market
forecasts.
Potential stock ideas that pass the initial review stage are researched
in-depth by an analyst of the Adviser. For most stocks researched, the analyst:
- reviews corporate documents;
- reviews existing research reports written by third-party sources;
- prepares a comprehensive income statement model;
- reviews industry comparisons; and
- meets and talks with the company's senior management, usually
the CFO and/or CEO.
If the stock idea still appears to be an attractive investment after that
research, the analyst presents it to the investment staff for discussion. After
the investment staff's review and input, the portfolio manager personally makes
the final buy or sell decision for the Fund.
SKYLINE'S BUY/SELL DISCIPLINE
The Adviser believes that each holding in the Fund's portfolio should be
considered a "buy" at all times. Once the portfolio manager no longer wants to
buy the stock, it should be sold and replaced with a better stock. In general,
stocks are replaced when they achieve sell targets, when the investment staff
believes they no longer have strong appreciation potential or when fundamental
conditions deteriorate such that the original investment thesis is no longer
valid. Assumptions and
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purchase decisions are re-evaluated on an on-going basis for each portfolio
security so that the portfolio remains consistent with the Adviser's investment
philosophies.
WHO MANAGES THE FUND
THE PORTFOLIO MANAGER
WILLIAM M. DUTTON is portfolio manager of Special Equities Portfolio. He works
as a member of the investment staff, but makes all final investment decisions
for the Fund. Mr. Dutton is president of Skyline Funds and has been the
portfolio manager of the Fund 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, an independent mutual fund rating service. 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.
THE ADVISER
The Fund's investment adviser is Skyline Asset Management, L.P., 311 South
Wacker Drive, Suite 4500, Chicago, Illinois 60606. The Adviser has advised and
managed the Fund since 1995; the partners of the Adviser have been a part of the
management of the Fund since the Fund was organized in 1987. The officers of the
Adviser manage the day-to-day operations of the Adviser. The Adviser manages the
Fund's investments. In addition, the Adviser provides office space, facilities,
equipment, and personnel for managing the assets and administering the Fund's
day-to-day operations, and provides shareholder and investor services.
For its advisory, management, and administrative services, and for the
assumption of its ordinary operating expenses, the 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 the Fund's expenses (including the
Adviser's fee, and trustees' fees and expenses, but excluding extraordinary
costs or expenses not incurred in the ordinary course of the Fund's operation)
to 1.75% of the average daily net assets of the Fund. Expenses incurred
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in excess of these limits, if any, will be reimbursed to the Fund by the
Adviser. For the most recent fiscal year, the Fund paid 1.47% of its average net
assets in comprehensive management fees to the Adviser.
RISKS
Risk is a part of investing in mutual funds that invest in stocks. The biggest
risk of investing in the Fund is market risk--the risk that a particular stock,
stocks of companies in a particular industry, or stocks of small companies may
fall in value. As a result, you may receive little or no return on your
investment or may lose part or all of your investment.
Stock markets tend to move in cycles, with periods of rising stock prices and
periods of falling stock prices. As a result, the Fund should be considered a
long-term investment, designed to provide the best results when held for several
years or more.
Because the Fund invests in stocks of small companies, which tend to be more
volatile and less liquid than stocks of large companies, investing in the Fund
may involve an above-average degree of risk. Small companies, as compared to
large companies, may have a shorter history of operations, may not have as great
an ability to raise additional capital, may have a less diversified product line
making them susceptible to market pressure, and have a smaller public market for
their securities.
The Fund invests in "value" stocks--stocks that are undervalued and,
consequently, offer potential for appreciation. Value-oriented stocks have
historically underperformed stocks with stronger growth characteristics during
some periods and have outperformed during other periods.
The Fund buys and sells securities in the normal course of its investment
activities. The proportion of the Fund's investment portfolio that is sold and
replaced with new securities during a year is known as the portfolio turnover
rate. 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 the Fund's flexibility of investment
and emphasis on growth of capital, it may have greater portfolio turnover than
mutual funds that have primary objectives of income or maintenance of a balanced
investment position. 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
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considered ordinary income for Federal income tax purposes. See "Taxes" in this
prospectus and "Taxes" in the Statement of Additional Information.
HOW WE MANAGE RISK
The Adviser attempts 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, to produce a favorable risk/reward
ratio.
The Fund has adopted certain investment limitations that cannot be changed
without shareholder approval and are designed to limit investment risk and
maintain portfolio diversification. In particular, the Fund may not invest more
than:
- 5% of its total assets (valued at the time of investment) in any
one issuer, or acquire 10% of the voting securities of that issuer (this
restriction does not apply to government securities); or
- 25% of its total assets (valued at the time of investment) invested
in companies in a single industry (this restriction does not apply to
government securities).
The Fund may, from time to time, take a temporary defensive position that is
inconsistent with its principal investment strategies. When the Adviser believes
a temporary defensive position is necessary, the Fund may invest in high-quality
fixed-income securities or hold assets in cash or cash equivalents. Taking a
defensive position might prevent the Fund from achieving its investment
objective.
TYPES OF ACCOUNTS
You may set up an account directly with us, in any of the following ways.
INDIVIDUAL/JOINT TENANT
Individual accounts are owned by one individual. Joint tenant accounts have
two or more owners, and provide for rights of survivorship. Both accounts are
registered under one tax identification number.
GIFTS/TRANSFERS TO A MINORS (UGMA/UTMA)
These custodial accounts provide a way to invest money on behalf of a minor
child. An individual may give up to a total of $10,000 a year (including amounts
placed in UGMA/UTMA accounts), per child, without paying Federal gift tax. The
account is registered under the minor's social security number and earnings are
taxed at the minor's
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income level. Depending on state laws, you may set up a custodial account under
the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act
(UTMA).
TRUST
You must establish a trust before investing money on behalf of the trust. The
account is registered under the trust's tax identification number.
BUSINESS/ORGANIZATION
You may invest money on behalf of a corporation, association, partnership or
other group. We require a corporate resolution or certificate of authorization
to redeem shares.
RETIREMENT ACCOUNTS
Retirement plans provide individuals with tax-advantaged ways to save for
retirement, through contributions, which may be tax deductible, and tax-deferred
growth.
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
Traditional IRAs allow individuals with earned income who are under the age of
70 1/2 to save up to $2,000 per tax year for retirement. Contributions may be
tax deductible, subject to certain limits, and earnings grow tax-deferred. The
amount you can contribute to a traditional IRA in any year is reduced by the
amount you contribute to a Roth IRA.
ROTH IRAS
Roth IRAs allow individuals with adjusted gross incomes up to $95,000 per
year, to contribute up to $2,000 per tax year for retirement. Married couples
with adjusted gross incomes up to $150,000 who file a joint return can
contribute up to $4,000. Contributions to Roth IRAs are not tax-deductible, but
withdrawals are not taxable if the Roth IRA has been held at least five years,
and you are at least 59 1/2, disabled, or use the proceeds (up to $10,000) to
purchase a first home. The amount you can contribute to a Roth IRA in any year
is reduced by the amount you contribute to a traditional IRA.
ROLLOVER IRAS
Rollover IRAs allow individuals to rollover eligible distributions from an
employer-sponsored retirement plan into an IRA.
SIMPLE IRAS
SIMPLE-IRAs allow small business owners or those who are self-employed and
their eligible employees to elect to have a portion of their pay withheld on a
before-tax basis and saved in a tax-deferred account
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maintained for the individual employee. Generally, the employer is also required
to make a contribution for each employee who elects to contribute.
OTHER RETIREMENT PLANS
The Fund may be used as an investment in other kinds of retirement plans,
including Keogh or corporate profit-sharing and money purchase plans, 403(b)
plans, and 401(k) plans. All of these accounts need to be established by the
trustee of the plan.
INFORMATION ON PURCHASING SHARES
You may purchase shares of the Fund by setting up an account directly with us
or through certain broker-dealers or other intermediaries, some of which may
charge a transaction fee. We have authorized some intermediaries (called
"authorized agents" in this prospectus) to accept purchase orders and redemption
requests on our behalf. In some cases, an authorized agent or another
intermediary may not charge any transaction or other fees directly to you, but
instead may receive a fee from the Adviser based on the value of Fund shares
purchased through that agent. Any questions about purchasing shares through an
intermediary should be directed to us at 800.828.2759, or to the agent or
intermediary.
TO OPEN A NEW ACCOUNT WITH US:
BY MAIL
CHECK
- Complete and sign a Skyline Funds application. Make your check
payable to Skyline Funds.
- Mail your completed application and check to: Skyline Funds, c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201. If
you are using an overnight courier, send to: Skyline Funds, c/o Firstar
Mutual Fund Services, LLC, 615 East Michigan Street, Third Floor,
Milwaukee, WI 53202.
BY WIRE
- Call us at 800.828.2759 for instructions if you want to use a wire
transfer to purchase shares of the Fund.
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TO ADD TO AN EXISTING ACCOUNT:
BY MAIL
CHECK
- Complete the additional investment form provided with your
quarterly account statement or write a note providing your account number
and registration. Make your check payable to Skyline Funds.
- Mail to: Skyline Funds, c/o Firstar Mutual Fund Services, LLC,
P.O. Box 701, Milwaukee, WI 53201. If you are using an overnight courier,
send to: Skyline Funds, c/o Firstar Mutual Fund Services, LLC, 615 East
Michigan Street, Third Floor, Milwaukee, WI 53202.
BY WIRE
- Call us at 800.828.2759 for instructions if you want to use a wire
transfer to purchase shares of the Fund.
BY TELEPHONE
ELECTRONIC FUNDS PURCHASE
- Once you have established a Skyline Funds account, electronic
funds purchase allows you to purchase shares over the telephone by
debiting your bank account. To electronically debit your bank account, you
must hold your bank account at a financial institution that is an
Automatic Clearing House member. Simply complete the appropriate section
on the account application form and attach a voided check from your bank
account. We will complete most electronic purchases within the same
business day, if you call to place your order by 3:00 p.m., Central Time.
For more information on electronic funds purchase, see "Shareholder
Services--Electronic Funds Purchases."
EXCHANGE
- You may exchange into the Fund from two portfolio series of
Firstar Funds, Inc.--Money Market Fund and U.S. Government Money Market
Fund.
- For more information about exchanging out of a Firstar Money
Market Fund, you should consult the Firstar Money Market Funds'
prospectus, a copy of which can be obtained from us at 800.828.2759.
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BY AUTOMATIC INVESTMENT
AUTOMATIC INVESTMENT PLAN
- Once you have established a Skyline Funds account, automatic
investing allows you to make regular investments through automatic
deductions from your bank account. Simply complete the appropriate section
on the account application form and attach a voided check from your bank
account. For more information about automatic investing, see "Shareholder
Services--Automatic Investment Plan."
DIVIDEND PURCHASE PLAN
- You may use the dividend and capital gain distributions paid by
the Fund to buy shares of Money Market Fund and U.S. Government Money
Market Fund, portfolio series of Firstar Funds, Inc. You may obtain a copy
of the Firstar Money Market Funds' Prospectus from us at 800.828.2759. The
account into which the dividend and capital gain are to be invested must
meet the applicable minimum balance, and the account registrations must be
identical.
RULES THAT APPLY TO ALL SHARE PURCHASES:
- You must make all share purchases in U.S. dollars and checks
must be drawn on U.S. banks. We do not accept third party checks or credit
card checks for any purchase (initial or subsequent share purchases).
- If your check to purchase the Fund's shares does not clear, you
will be responsible for any resulting loss incurred by the Fund. A charge
(currently $25) will be assessed for any returned check.
- If you are going to open a new account by wire, you must fax
your application form to the transfer agent before sending the wire. You
must also promptly mail the original application form to Skyline Funds c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, Wisconsin
53201 (if using regular mail). We will not establish any account services
until we receive your completed application.
- The minimum initial investment to open an account is $1,000,
and subsequent investments must be at least $100.
- You must provide your Social Security or Taxpayer Identification
Number on the application form, and certify that it is correct, before we
will open an account for you. If you do not provide your correct Social
Security or Taxpayer Identification Number,
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or do not certify it, we may be required to withhold Federal income tax at
a rate of 31% ("backup withholding") from dividend payments and redemption
proceeds to you.
- We may reject a share purchase if we think accepting it would be
harmful to existing shareholders. We believe that frequent purchases and
redemptions of a Fund's shares by investors utilizing market-timing
strategies can adversely affect the management of the Fund. We intend to
reject purchase orders from investors we believe are market-timers.
- Generally, we do 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 our
books without issuance of certificates.
DETERMINING THE SHARE PRICE
The purchase price of the Fund's shares is the net asset value per share next
computed after receipt by our transfer agent or authorized agent (from the
Distributor or an authorized broker-dealer or directly from you) of your order
completed in accordance with the instructions on the account application. Our
transfer agent or authorized agent must receive your order before the close of
regular session trading on the New York Stock Exchange (normally 3:00 p.m.,
Central Time) to receive the net asset value calculated on that day. The Fund's
net asset value will not be calculated on days when the New York Stock Exchange
is closed.
The net asset value per share of the 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. Skyline values each security traded on a
national stock exchange or on the NASDAQ National Market 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. We value
other securities traded over-the-counter at the last reported bid price. We
value other assets and securities by methods that our board of trustees believes
will determine a fair value.
INFORMATION ON REDEEMING SHARES
There are several ways to redeem your Fund shares. You may send us a written
request, call us (if you have already authorized us to accept telephone
instructions), exchange into one of the available money market funds, or
participate in our systematic withdrawal plan. For
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your protection, some redemption requests may require a signature guarantee. For
further details, please see SIGNATURE GUARANTEES. The redemption process is
outlined in the following pages.
BY MAIL
- To redeem shares by mail, send a written request to Skyline's
transfer agent: Skyline Funds, c/o Firstar Mutual Fund Services, LLC, P.O.
Box 701, Milwaukee, WI 53201. If you are using an overnight courier, send
to Skyline Funds, c/o Firstar Mutual Fund Services, LLC, 615 East Michigan
Street, Third Floor, Milwaukee, WI 53202, or an authorized agent.
- All the owners of an account must sign the redemption request.
Signatures must appear exactly as they are on the account registration. We
will not accept redemption requests received by fax or other electronic
means.
BY TELEPHONE
Call us at 800.828.2759 to request that we redeem shares from your account by
telephone.
- To be eligible to redeem shares by telephone, you must have
authorized telephone redemption on your account application prior to
calling us with your redemption request.
- You may add the ability to redeem by telephone, if you did not
authorize it on your original account application, but you will have to
make the request in writing and have your signature(s) guaranteed.
- To reduce the risk of a fraudulent instruction, we will send your
redemption check only to the address or bank/brokerage account as shown on
our records. We record all telephone redemption requests.
- You may not redeem shares held in an IRA account by telephone.
- During periods of volatile economic and market conditions, you
may have difficulty making a redemption request by telephone, in which
case you will need to make your redemption request in writing.
BY WIRE
MAIL
- To redeem shares by mail and have the proceeds sent to your
bank or brokerage account by wire transfer, send a written request to
Skyline's transfer agent: Skyline Funds, c/o Firstar Mutual Fund Services,
LLC, P.O. Box 701, Milwaukee, WI 53201.
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If you are using an overnight courier, send to Skyline Funds, c/o Firstar
Mutual Fund Services, LLC, 615 East Michigan Street, Third Floor,
Milwaukee, WI 53202, or an authorized agent.
- You must provide the name of the bank/broker, name(s) on the
account, address and ABA number on your written request. We will deduct
the wire fee, currently $12.00, from the proceeds.
- All the owners of an account must sign the redemption request
and have their signatures guaranteed. Signatures must appear exactly as
they are on the account registration. We will not accept redemption
requests received by fax or other electronic means.
TELEPHONE
- Call us at 800.828.2759 to request that we redeem shares from
your account by telephone and send the redemption proceeds by wire
transfer to a predetermined bank or brokerage account.
- To be eligible to redeem shares by telephone and have the
proceeds sent to you by wire transfer, you must have authorized telephone
redemption by wire transfer on your account registration prior to calling
us with your redemption request.
- You may add the ability to redeem by telephone, if you did not
authorize it on your original account application, but you must make the
request in writing and have your signature(s) guaranteed.
- To reduce the risk of a fraudulent instruction, we will send your
redemption proceeds only to the address or bank/brokerage account as shown
on our records. We record all telephone redemption requests.
- You may not redeem shares held in an IRA account by telephone.
- 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.
RULES THAT APPLY TO ALL SHARE REDEMPTIONS:
- The price you receive for your redeemed shares is the net asset
value next determined after our transfer agent or an authorized agent
receives your request. We calculate net asset value as of the time of the
close of regular session trading on the New York Stock Exchange (normally
3:00 p.m., Central Time). See "Determining the Share Price."
15
<PAGE>
- We do not charge any fees for a redemption paid by check, but an
authorized agent may charge a fee for this service. Our transfer agent
does charge a wire fee, currently $12.00, on redemptions by wire transfer.
- We will pay all redemption proceeds by check or wire. If specified
in the account application, the check will be made payable and sent to a
designated financial institution. We will only send a wire to the bank or
brokerage account as shown on your original account application, or in a
written instruction you have given us with your signature guaranteed. We
generally pay wire requests the next business day after we receive your
redemption request and we will deduct the cost of the wire transfer
(currently $12.00) from the proceeds. We reserve the right to change the
wire transfer fee and any similar service fee without prior notice to you.
We do not permit wires to third parties other than your designated bank or
brokerage account.
- We 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, we may delay
payment of the redemption proceeds until we 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.
- We reserve the right to redeem shares in any account with a
balance less than $750 in share value in the Fund. Prior to any such
redemption, we 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. We will
waive the $750 minimum balance requirement if an account balance drops
below $750 due to market activity.
- If you purchased your shares through an authorized agent or
another intermediary, you may also redeem your shares through that
intermediary. Contact that intermediary for information about its
requirements. An intermediary may charge a fee for its services.
- If you are making a redemption request on behalf of a
corporation, partnership, trust, fiduciary, executor, or administrator,
you must send us written evidence of your authority to act.
16
<PAGE>
- WE WILL NOT MAKE YOUR REDEMPTION CHECK PAYABLE TO ANYONE OTHER
THAN YOU (USING THE NAME SHOWN ON THE FUND'S RECORDS), OR YOUR DESIGNATED
BANK OR BROKER/DEALER, FOR DEPOSIT TO AN ACCOUNT YOU HAVE AUTHORIZED.
- The post office will not forward your redemption check if you
move. If you have moved, indicate your change of address on your
redemption request and have your signature guaranteed.
SIGNATURE GUARANTEES. A signature guarantee is a way to protect the Fund and
its shareholders, by guaranteeing that the person signing a request is really
the person he or she claims to be. We try to balance the need to protect the
Fund with the inconvenience to you of having your signature guaranteed. You must
obtain a signature guarantee on a written redemption request if:
- the redemption check is to be sent to an address other than the
address shown on your account,
- the redemption check is to be sent to a bank or brokerage
account not previously authorized in accordance with the instructions on
your account,
- the proceeds of the redemption would be more than $10,000,
- YOU CHANGED YOUR ADDRESS OF RECORD BY TELEPHONE OR IN WRITING WITHIN
THE LAST 60 DAYS, OR
- you are redeeming shares that have been issued in certificate
form.
Your signature must be guaranteed by 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 CANNOT
GUARANTEE A SIGNATURE.
SHAREHOLDER SERVICES
SHAREHOLDER ACCOUNTS. You will receive a quarterly account statement showing
transactions in the Fund's shares with a balance denominated in the Fund's
shares. You will also receive a confirmation showing each 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 Mutual Fund Services, LLC. If you transfer ownership of your account, we
require each record owner of the account to provide a signature guarantee. For
additional information, please call us at 800.828.2759.
CHANGES TO YOUR ADDRESS. You may change your address of record over the
telephone or in writing. You may change your address by calling us at
800.828.2759. To change your address of record by written
17
<PAGE>
request, write to our transfer agent: Skyline Funds, c/o Firstar Mutual Fund
Services, LLC, P.O. Box 701, Milwaukee, WI 53201. If you are using an overnight
courier, send to Skyline Funds, c/o Firstar Mutual Fund Services, LLC, 615 East
Michigan Street, Third Floor, Milwaukee, WI 53202. However, if you have changed
your address of record within the last 60 days, you may only redeem your shares
in writing and must include a signature guarantee.
EXCHANGE PLAN. Skyline offers an exchange plan between the Fund and two
portfolio series of Firstar Funds, Inc.--Money Market Fund and U.S. Government
Money Market Fund. All exchanges are made at the net asset value per share next
calculated after the receipt of an exchange request. To be effective on that
date, a request to exchange in or out of a Firstar Money Market Fund must be
received by the purchase or redemption cutoff time described in the Firstar
Money Market Funds' prospectus, a copy of which can be obtained from us at
800.828.2759.
You may not use the telephone exchange plan 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 us on the account
application that such authorization has been withheld. Unless authorization is
withheld, we will honor exchange requests by telephone at 800.828.2759. We
record all telephone exchange requests. We, and our transfer agent, will be
liable for losses resulting from unauthorized telephone redemptions only if we
do not follow reasonable procedures designed to verify the identity of the
caller. You should immediately verify your trade confirmations when you receive
them. 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.
WE RESERVE 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 (FOR EXAMPLE, MORE THAN FOUR EXCHANGES PER CALENDAR
YEAR).
Exchanges of shares are taxable events and may result in a gain or loss for
federal income tax purposes.
AUTOMATIC INVESTMENT PLAN. Once you have established an account, you have the
option to start an Automatic Investment Plan. Automatic investing allows you to
make regular investments through automatic deductions from your bank account.
Simply complete the appropriate section of the account application and attach a
voided check from your bank account.
One of the benefits of automatic investing is dollar cost averaging. Because
you regularly invest a fixed amount of money over a period of
18
<PAGE>
years regardless of the share price, you buy more shares when the price is low
and fewer shares when the price is high. As a result, the average share price
you pay should be less than the average share price of Fund shares over the same
period. To be effective, dollar cost averaging requires that you invest over a
long period of time, but does not assure a profit.
You may call us at 800.828.2759 to make certain changes to your automatic
investment plan. You may change the dollar amount of your automatic investment,
change the date of your automatic investment, suspend your automatic investments
for up to six months or terminate your participation in the plan. You should
call us at least three days prior to your next investment date for these changes
to take effect for that investment. You can change your bank account information
by sending a letter along with a voided check or a withdrawal slip for your new
bank account. We will waive the minimum subsequent investment amount of $100.00
for automatic investments. Automatic investments may be as low as $50.00 per
purchase.
ELECTRONIC FUNDS PURCHASES. Once you have established an account, you may
purchase shares over the telephone by debiting your bank account. To
electronically debit your bank account, you must hold your bank account at a
financial institution that is an Automatic Clearing House member. Simply
complete the appropriate section on the account application form and attach a
voided check from your bank account.
The purchase price for the shares will be the net asset value per share next
computed after receipt by our transfer agent of your telephone purchase if you
call to place your order by 3:00 p.m., Central Time. We will initiate most
electronic transfers from your banking account to pay for the share purchase
within that same business day. We may modify or terminate the ability to
purchase shares by phone at any time, or from time to time, without notice to
shareholders.
We, and our transfer agent, will be liable for losses resulting from
unauthorized telephone purchases only if we do not follow reasonable procedures
designed to verify the identity of the caller. You should immediately verify
your trade confirmations when you receive them.
SYSTEMATIC WITHDRAWAL PLAN. You may also arrange for us to redeem shares with
a specified dollar value on a periodic basis. Payment is sent by check to the
record shareholder(s) of the account. To initiate the Systematic Withdrawal
Plan, your account must have a share balance of $5,000 or more and the periodic
withdrawal must be in an amount of $100 or more. Skyline may modify or terminate
the Systematic Withdrawal Plan at any time, or from time to time, without notice
to shareholders.
19
<PAGE>
RETIREMENT PLANS. You may use the Fund as an investment for your Individual
Retirement Account ("IRA"), 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. For more information on
opening a retirement plan account with us, please call 800.828.2759.
DISTRIBUTIONS AND TAXES
DISTRIBUTION PAYMENT AND REINVESTMENT OPTIONS. The Fund automatically
reinvests your dividends and distributions in additional Fund shares unless you
request otherwise. You may have your dividends paid to you by check, deposited
directly into your bank account, or reinvested in the Fund or one of the Firstar
Money Market Funds. The Fund expects to declare and pay net investment income
dividends and distributions of net realized short- and long-term capital gains,
if any, at least annually. Because of the kinds of investments the Fund makes,
its distributions tend to be more from short-term and long-term gains than from
investment income.
TAXES AND TAX REPORTING. The Fund's distributions are taxed as ordinary
income or capital gains. Dividends from the Fund's long-term capital gains are
taxable as capital gains, while dividends from short-term capital gains and net
investment income are generally taxable as ordinary income. The tax you pay on a
capital gains distribution depends generally on how long the Fund has held the
portfolio securities it sold, and so may qualify as long-term capital gains even
if you have held your Fund shares less than 12 months.
Early in each year, you will receive a statement showing the amount and nature
of all dividends and capital gain distributions paid to you during the year. The
tax status of your dividends and distributions is not affected by whether you
reinvest them or receive them in cash. The sale of shares in your account may
produce a gain or loss, and is a taxable event. For tax purposes, an exchange is
the same as a sale. Shareholders who are not subject to income taxation will not
be required to pay tax on amounts distributed to them.
Tax laws are subject to change, so we urge you to consult your tax adviser
about your particular tax situation. Please note that if you do not give us your
correct Social Security number or employer identification number, federal law
requires us to withhold federal income tax from your distributions and
redemption proceeds at a rate of 31%.
20
<PAGE>
BUYING AND SELLING SHARES CLOSE TO A RECORD DATE. Any dividends or
distributions have the effect of reducing the per share net asset value by the
amount of the dividends or distributions. Buying Fund shares shortly before the
record date for a dividend is sometimes called "buying the dividend." The entire
dividend will be taxable to you, even though a portion of the dividend
effectively represents a return of your purchase price.
SHAREHOLDER INQUIRIES
Inquiries should be addressed to Skyline Funds, c/o Firstar Mutual Fund
Services, LLC, P.O. Box 701, Milwaukee, Wisconsin 53201. Telephone inquiries may
be made at 800.828.2759.
OUR SERVICE PROVIDERS
Firstar Mutual Fund Services, LLC is the Funds' transfer agent, shareholder
servicing agent and provides accounting services to the Fund and Firstar Bank
Milwaukee is the custodian of the Fund's assets. Firstar's address is
P.O. Box 701, Milwaukee, Wisconsin 53201.
FINANCIAL HIGHLIGHTS
The following table is intended to help you understand the Fund's recent past
financial performance. Certain information reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned or lost on an investment in the Fund (assuming
reinvestment of all dividends and distributions). The information presented has
been audited and reported on by Ernst & Young LLP, Skyline Funds' independent
auditors. The auditors' report, the Fund's financial statements, and further
information about the performance of the Fund is contained in the Fund's Annual
Reports and the Statement of Additional Information, which may be obtained from
us free of charge.
21
<PAGE>
SPECIAL EQUITIES PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning
of year..................... $ 19.78 $ 21.66 $ 18.16 $ 16.79 $ 15.64
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment loss........ (0.14) (0.11) (0.07) (0.04) (0.06)
Net realized and unrealized
(loss) gain on
investments............... (2.51) (1.45) 6.46 5.02 2.21
-------- -------- -------- -------- --------
Total from investment
operations................ (2.65) (1.56) 6.39 4.98 2.15
-------- -------- -------- -------- --------
Less distributions from net
realized gains on
investments............... (1.23) (0.32) (2.89) (3.61) (1.00)
-------- -------- -------- -------- --------
Net asset value at end of
year...................... $ 15.90 $ 19.78 $ 21.66 $ 18.16 $ 16.79
======== ======== ======== ======== ========
TOTAL RETURN................. (13.28%) (7.17%) 35.43% 30.37% 13.83%
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to
average net assets........ 1.48% 1.47% 1.48% 1.51% 1.51%
Ratio of net investment
loss to average net
assets.................... (0.32%) (0.50%) (0.41%) (0.32%) (0.35%)
Portfolio turnover rate.... 81% 68% 62% 130% 71%
Net assets at end of year (in
thousands).................. $220,346 $445,024 $467,070 $219,480 $174,899
======== ======== ======== ======== ========
</TABLE>
- ------------------------
NOTE TO FINANCIAL HIGHLIGHTS:
(a) Effective September 1, 1995, Skyline Asset Management, L.P. became the
investment adviser to Skyline Special Equities Portfolio.
22
<PAGE>
Additional sources of information are available to you. The Statement of
Additional Information (SAI), incorporated by reference into this Prospectus,
contains detailed information on Skyline Funds policies and operation.
Shareholder reports contain management's discussion of market conditions,
investment strategies and performance results as of our latest semi-annual or
annual fiscal year end. You may obtain free copies of our annual and semi-annual
reports, the Statement of Additional Information, or request any other
information and discuss your questions about us by writing or calling:
Skyline Funds
c/o Firstar Mutual Fund
Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
800.828.2759
In addition, you may obtain this and other information about us directly from
the Securities and Exchange Commission (SEC). You may visit the SEC online at
http://www.sec.gov or in person at the SEC's Public Reference Room in Washington
D.C. You may obtain information about the Public Reference Room by calling the
SEC at (800) 942-8090. After paying the appropriate duplicating fee, you may
also obtain copies by writing to the SEC's Public Reference Section at 450 5th
Street, N.W., Washington, DC 20549-6009 or by e-mail request at
[email protected].
SKYLINE FUNDS-REGISTERED TRADEMARK-
- ----------------------------
SPECIAL EQUITIES PORTFOLIO
PROSPECTUS
MARCH 1, 2000
- ----------------------------
311 SOUTH WACKER DRIVE
SUITE 4500
CHICAGO, IL 60606
800.828.2759
SKYLINE FUNDS, THE SKYLINE LOGO, AND SPECIAL EQUITIES PORTFOLIO
ARE REGISTERED SERVICE MARKS OF AFFILIATED MANAGERS GROUP, INC.
Investment Company Act file number: 811-5022
<PAGE>
SKYLINE FUNDS-Registered Trademark-
311 South Wacker Drive, Suite 4500
Chicago, Illinois 60606
(800) 828.2759
STATEMENT OF ADDITIONAL INFORMATION
March 1, 2000
- -------------------------------------------------------------------------------
Skyline Special Equities Portfolio is a series of Skyline Funds
("Skyline"). 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 dated March 1, 2000, and any supplement to that
Prospectus. The Fund's Prospectus can be obtained without charge by calling or
writing to Skyline.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
SKYLINE .......................................................2
SHARES .......................................................2
INVESTMENT POLICIES.............................................2
INVESTMENT RESTRICTIONS.........................................3
PERFORMANCE INFORMATION.........................................5
PRINCIPAL SHAREHOLDERS..........................................8
MANAGEMENT OF SKYLINE...........................................9
INVESTMENT ADVISORY SERVICES...................................11
PORTFOLIO TRANSACTIONS AND BROKERAGE...........................13
PURCHASE AND REDEMPTION OF SHARES..............................14
TAXES ......................................................15
GENERAL INFORMATION............................................15
FINANCIAL STATEMENTS...........................................17
</TABLE>
<PAGE>
SKYLINE
Skyline was organized as a Massachusetts business trust on February 4,
1987, and is an open-end, diversified management investment company. Skyline
currently has one series of shares, Skyline Special Equities Portfolio, which
began operations April 23, 1987. 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. As used in this Statement of Additional Information,
"Special Equities Portfolio" means Skyline Special Equities Portfolio. Special
Equities Portfolio is sometimes referred to as the "Fund." Skyline Asset
Management, L.P. (the "Adviser") provides investment advisory and administrative
services to the Fund.
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. Currently, there is one
series authorized and outstanding. All shares issued will be fully paid and
non-assessable and will have no preemptive or conversion rights. Each share 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
have equal rights in the event of liquidation of that series.
Each Skyline share has one vote and fractional shares have fractional
votes. As a Massachusetts business trust, Skyline is not required to hold annual
shareholder meetings. However, Skyline may call special meetings to elect or
remove trustees, change fundamental policies or approve an investment advisory
agreement. Upon request of at least 10% of the outstanding shares of Skyline,
Skyline will call a special meeting of shareholders for a purpose that requires
action by the shareholders.
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 Fund 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 the Fund of all losses and expenses of any
shareholder held personally liable for the obligations of the 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.
INVESTMENT POLICIES
TEMPORARY INVESTMENTS. To manage cash inflows or in anticipation of
redemptions, the Fund may, from time to time, take temporary investment
positions that are inconsistent with its principal investment strategies. When
the Adviser believes a temporary defensive position is necessary, the Fund may
invest, without limitation, in high-quality fixed-income securities and
2
<PAGE>
may hold assets in cash or cash equivalents. Taking such a position might
prevent the Fund from achieving its investment objective.
REPURCHASE AGREEMENTS. The 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. The 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
Fund did not invest in repurchase agreements in the most recent fiscal year and
has no present intention of investing in repurchase agreements in the coming
year.
FOREIGN SECURITIES. The Fund 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 guaranteed by a United States person. The Fund does not
expect to invest more than 5% of its net assets in foreign securities.
PORTFOLIO TURNOVER. The portfolio turnover rate of Special Equities
Portfolio was 68% in 1998 and 81% in 1999. Although the Fund does 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, the Fund 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 the Fund's flexibility of investment and emphasis on growth of
capital, it may have greater portfolio turnover than that of mutual fund that
has a primary objective 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
"Distributions and Taxes" in the Fund's prospectus, and "Taxes" in this
statement of additional information.)
INVESTMENT RESTRICTIONS
Skyline has adopted certain fundamental investment restrictions that may
not be changed without the approval of a majority of the Fund's outstanding
shares. The Fund's fundamental investment restrictions are as follows:
The Fund may not:
1. Issue senior securities or borrow money except (i) from banks for
temporary or emergency purposes in amounts not exceeding 10% of the value
of the
3
<PAGE>
Fund's assets at the time of borrowing (including the amount borrowed) (the
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).
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 more than 25% of its assets (valued at the time of
investment) in the securities of companies in any one single industry,
except government obligations.
8. Make loans to other persons except that it reserves freedom of
action, consistent with its other investment policies and restrictions, to
purchase bonds or other debt obligations of types commonly offered publicly
or privately and purchased by financial institutions, even though the
purchase of such debt obligations may be deemed to be making loans.
9. Underwrite any issue of securities, except as it may be deemed to
be an underwriter under the Securities Act of 1933 in connection with the
sale of securities in accordance with its investment objective, policies,
and limitations.
Skyline also has adopted the following additional restrictions and policies
with respect to the Fund (which may be changed by the board of trustees without
shareholder approval). Under these additional policies and restrictions, the
Fund may not:
A. Invest in companies for the purpose of exercising control or
management.
4
<PAGE>
B. Acquire securities of other investment companies except (i) by
purchase in the open market, where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
commission and (ii) where the acquisition results from a dividend, or a
merger, consolidation or other reorganization. In addition to this
restriction, the 1940 Act provides that the 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. 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
Fund. Total return for a period is the percentage change in value during the
period of an investment in the 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)
5
<PAGE>
For example, total return and average annual total return at December 31,
1999 of an investment of $1,000 in Special Equities Portfolio were:
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL TOTAL
RETURN (%) RETURN (%)
----------- -----------
<S> <C> <C>
1 Year.......................................... -13.28% -13.28%
5 Years......................................... 61.79% 10.10%
10 Years........................................ 274.07% 14.10%
Life of the Fund (April 23, 1987)............... 400.39% 13.53%
</TABLE>
Total return and average annual total return figures assume reinvestment of
all dividends and distributions. Income taxes are not taken into account. The
Fund's performance figures are not a guarantee of future results. The Fund's
performance is a result of conditions in the securities markets, portfolio
management, and operating expenses. Although total return information is useful
in reviewing the 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 the 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 Fund. The comparison of the Fund to an alternative
investment should consider differences in features and expected performance.
The 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 that might mention Skyline and the Fund include, but are not limited
to, the following:
<TABLE>
<S> <C>
Barron's Investor's Daily
Bloomberg Personal Finance Kiplinger's Personal Finance
Business Week Los Angeles Times
Changing Times Money
Chicago The Mutual Fund Letter
Chicago Tribune Mutual Fund Values (Morningstar)
Chicago Sun-Times Newsweek
Crain's Chicago Business The New York Times
Consumer Reports Pensions and Investments
Consumer Digest Personal Investor
Financial Planning Smart Money
Financial World Time
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
FA Advisor USA Today
Forbes U.S. News and World Report
Fortune The Wall Street Journal
Institutional Investor Worth
Investment News
</TABLE>
When a newspaper, magazine, or other publication mentions Skyline or the
Fund, such mention may include: (i) listings of some or all of the Fund's
holdings; (ii) descriptions of characteristics of some or all of the securities
held by the 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 the Fund, in the view of
Skyline, a portfolio manager or the Adviser.
The Fund may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
The performance of the Fund may be compared to stock market indexes or
averages, including the following:
<TABLE>
<S> <C>
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 2000 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.)
</TABLE>
The Fund's performance may also be compared to mutual fund industry indexes
or averages, including the following: Value Line Index; Lipper Small-Cap Value
Equity Index; Lipper Small-Cap General Equity Index; Lipper Small-Cap Growth
Equity Index; Lipper Small-Cap Aggressive Equity Index; Morningstar Growth
Average; Morningstar Aggressive Growth
7
<PAGE>
Average; Morningstar U.S. Diversified Average; Morningstar Equity Fund Average;
Morningstar Hybrid Fund Average; Morningstar All Equity Fund Average;
Morningstar General Equity Average; Morningstar MidCap/Value Average; and
Morningstar Small Cap Value Average.
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 Fund 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 Fund to a different category or develop (and place the
Fund into) a new category, the Fund may compare its performance or ranking
against other funds in the newly assigned category, as published by the service.
Moreover, the Fund 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 Fund 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 Fund may use Ibbotson's historical data regarding the Consumer Price Index.
The Fund 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 the Fund as of
January 31, 2000 were Charles Schwab & Co., Inc., as a nominee for various
beneficial owners, which held 27.2% and Boston Safe Dep. and Trust as a trustee
for the benefit of Eastman Kodak employees, which held 5.4% of the shares of
Special Equities Portfolio. The address of Charles Schwab & Co., Inc. is 101
Montgomery Street, San Francisco, California 94104. The address of Boston Safe
Dep. and Trust is 1 Cabot Road, Medford, Massachusetts 02155.
8
<PAGE>
MANAGEMENT OF SKYLINE
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.
Trustees and officers of Skyline, and their principal business occupations
during at least the last five years, are shown below.
WILLIAM M. DUTTON,* 46, PRESIDENT AND TRUSTEE. Managing Partner, Chief
Investment Officer and Portfolio Manager, Skyline Asset Management, L.P. and
registered representative, Fund Distributor, Inc., since September 1995.
Previously, Executive Vice President and Portfolio Manager (Special Equities
Portfolio), Mesirow Asset Management, Inc.
WILLIAM L. ACHENBACH, 57, TRUSTEE. President, W.L. Achenbach & Associates,
Inc., a financial counseling firm.
PAUL J. FINNEGAN, 46, TRUSTEE. Managing Director, Madison Dearborn
Partners, Inc., a venture capital firm.
DAVID A. MARTIN, 48, TRUSTEE. Attorney and Principal, Righeimer, Martin &
Cinquino, P.C.
RICHARD K. PEARSON, 60, TRUSTEE. President, First DuPage Bancorp, Inc.
(Westmont, Illinois) and President and Chief Executive Officer, First DuPage
Bank since November 1998, 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.
STEPHEN F. KENDALL, 45, EXECUTIVE VICE PRESIDENT, TREASURER AND SECRETARY.
Partner and Chief Operating Officer, Skyline Asset Management, L.P., since
January 1998. Previously, Regional Vice President, Metro Region, Nabisco Biscuit
Company.
KENNETH S. KAILIN, 41, EXECUTIVE VICE PRESIDENT. Partner, Portfolio
Management, Skyline Asset Management, L.P., since September 1995. Portfolio
Manager, Skyline Asset Management, L.P. from September 1995 to February 2000,
and prior to joining Skyline Asset Management, Senior Vice President and
Portfolio Manager, Mesirow Asset Management, Inc.
- ---------------------
* Indicates an "interested person" of Skyline, as defined in the Investment
Company Act of 1940.
9
<PAGE>
GEOFFREY P. LUTZ, 49, EXECUTIVE VICE PRESIDENT. Partner and Institutional
Marketing, Skyline Asset Management, L.P. and registered representative, Fund
Distributor, Inc., since September 1995. Previously, Vice President, Mesirow
Asset Management, Inc., and registered representative, Mesirow Financial, Inc.
and Mesirow Investment Services, Inc.
MICHAEL MALONEY, 38, SENIOR VICE PRESIDENT. Partner and Securities Analyst,
Skyline Asset Management, L.P., since September 1995. Previously, Securities
Analyst, Mesirow Asset Management, Inc.
MICHELE M. BRENNAN, 28, VICE PRESIDENT. Director of Fund Marketing, Skyline
Asset Management, L.P., since August 1996. Previously, Regional Marketing
Associate, Strong Capital Management, an investment adviser.
Messrs. Achenbach, Finnegan, Martin and Pearson serve as members of the
Committee of the Independent Trustees, which functions as an audit committee. As
such, the Committee makes recommendations to the Board of Trustees regarding the
selection of auditors, confers with the auditors regarding the scope and results
of the audit.
The address of Messrs. Dutton, Kendall, Kailin, Lutz, and Maloney 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 22902; 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 January 31, 2000, the trustees and officers of Skyline owned, in
the aggregate, 167,780 shares of Special Equities Portfolio, 12,936 shares of
Skyline Small Cap Value Plus, and 40,563 shares of Skyline Small Cap
Contrarian, which represents 1% of Special Equities Portfolio, less than 1%
of Skyline Small Cap Value Plus and 9% of Skyline Small Cap Contrarian. After
the reorganization of each of Skyline Small Cap Value Plus and Skyline Small
Cap Contrarian into Special Equities Portfolio, the aggregate value of the
shares of Special Equities Portfolio received by the trustees and officers of
Skyline in exchange for their shares of Small Cap Value Plus and Small Cap
Contrarian will be equal to the aggregate net asset value of such trustee or
officer's Small Cap Value Plus and Small Cap Contrarian shares immediately
prior to the reorganization.
Effective March 1, 2000, the trustees of Skyline who are not
"interested persons" of Skyline, as defined in the Investment Company Act of
1940 (the "1940 Act"), will receive from Skyline an annual aggregate retainer
of $6,000 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.
10
<PAGE>
The following table sets forth compensation paid by Skyline during the
fiscal year ended December 31, 1999, to each trustee of Skyline. Skyline has no
retirement or pension plans. The trustees and officers affiliated with Skyline
do not receive compensation from Skyline.
<TABLE>
<CAPTION>
Aggregate Compensation
Name of Trustee From Skyline Funds
- -------------------------------------------------------------------------------
<S> <C>
William L. Achenbach................ $11,400
William M. Dutton(1).................. 0
Paul J. Finnegan.................... 11,400
David A. Martin..................... 11,800
Richard K. Pearson.................. 11,800
</TABLE>
- ----------------------------
(1) Indicates an "interested person" of Skyline, as defined in the 1940 Act.
INVESTMENT ADVISORY SERVICES
The Adviser provides investment advisory and administrative services to
Skyline for Special Equities Portfolio pursuant to an Investment Advisory
Agreement dated May 28, 1998 (the "Agreement"). The Adviser is a Delaware
limited partnership that was formed in 1995. The general partner of the Adviser
is Affiliated Managers Group, Inc. ("AMG") and the limited partners are
corporations wholly owned by Messrs. Dutton, Kailin, Lutz, Maloney, Kendall,
Mark Odegard and Bill Fiedler, 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.
Under the Agreement, the Adviser pays all of the Fund's ordinary costs and
expenses attendant to operating the Fund 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.
For its management and advisory services, for providing shareholder and
investor servicing, and for the assumption of the Fund's ordinary operating
expenses, the Adviser is paid a monthly comprehensive fee from the Fund based on
the Fund's average daily net assets. Under the Agreement, the 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 the Fund to the extent that,
in any fiscal year, the aggregate expenses of the Fund, including the advisory
fee, and trustees' fees and 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.
Reimbursement, if any, is made monthly.
11
<PAGE>
The Fund paid comprehensive management fees to the Adviser totaling
$5,246,839, $7,049,303 and $5,196,131 in the fiscal years ended December 31,
1999, 1998 and 1997, respectively.
The Agreement provides 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
Agreement.
The Agreement may be continued from year to year only so long as its
continuance 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 the Fund. The Agreement is terminable
with respect to the Fund without penalty, on 60 days' notice, by the trustees of
Skyline or by vote of a majority of the outstanding shares of the Fund, or, on
not less than 90 days' notice, by the Adviser. The Agreement 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. The Fund has a portfolio manager who is responsible for
its day-to-day management. The 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.
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.
CODE OF ETHICS
The 1940 Act and rules thereunder require that Skyline and the Adviser
establish standards and procedures for the detection and prevention of certain
conflicts of interest, including activities by which persons having knowledge of
the investments and investment intentions of Skyline might take advantage of
that knowledge for their own benefit. Skyline and the Adviser have adopted a
Code of Ethics to meet those concerns and legal requirements. Although the Code
does not prohibit employees who have knowledge of the investments and investment
intentions of Skyline from engaging in personal securities investing, it does
regulate such personal securities investing by these employees as a part of the
effort by Skyline and the Adviser to detect and prevent conflicts of interest.
12
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Portfolio transactions are placed with those securities brokers and dealers
that the Adviser believes will provide the best value in transaction and
research services either in a particular transaction or over a period of time.
Although some transactions involve only brokerage services, many involve
research services as well.
In valuing brokerage services, the Adviser makes a judgment as to which
brokers are capable of providing the most favorable net price (not necessarily
the lowest commission considered alone) and the best execution in a particular
transaction. Best execution connotes not only general competence and reliability
of a broker, but specific expertise and effort of a broker in overcoming the
anticipated difficulties in fulfilling the requirements of particular
transactions, because the problems of execution and the required skills and
effort vary greatly among transactions.
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 Fund. 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 Fund are reviewed periodically by Skyline's board
of trustees.
The Adviser is the principal source of information and advice to the Fund
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.
13
<PAGE>
The Adviser is further authorized to allocate the orders placed by it on
behalf of Skyline to brokers and dealers who provide research services to
Skyline or the Adviser. Consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., and subject to the policy of
seeking the best price and execution as stated above, sales of shares of Skyline
by a broker-dealer may be considered by the Adviser in the selection of
broker-dealers to execute portfolio transactions for Skyline.
Although investment decisions for Skyline are made independently from those
for other investment advisory clients of the Adviser, the same investment
decision may be made for both Skyline and one or more other advisory clients. If
both Skyline and other clients purchase or sell the same class of securities on
the same day, the transactions will be allocated as to amount and price in a
manner considered equitable to each.
The following table shows the aggregate brokerage commissions (excluding
the gross underwriting spread on securities purchased in underwritten offerings)
paid by Special Equities Portfolio during the periods indicated. No commissions
were paid to persons who were affiliated persons of Skyline as of the time such
payments were made.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Aggregate commissions $1,418,582(100%) $1,120,059(100%) $995,672(100%)
</TABLE>
Of the aggregate brokerage commissions paid during the fiscal year ending
December 31, 1999, Special Equities Portfolio paid $1,079,107 to brokers who
furnished research services, and such brokers effected transactions aggregating
73% of the aggregate dollar amount of transactions involving the payment of
brokerage commissions by Special Equities Portfolio.
The Adviser may place brokerage transactions with brokers affiliated with
the distributor for Skyline, Fund 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 "Types of Skyline Funds Accounts and Information on Purchasing Shares,"
"Redeeming Shares," and "Shareholder Services." All of that information is
incorporated herein by reference.
NET ASSET VALUE. The net asset value of the shares of the 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 the 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
14
<PAGE>
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 the 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 the 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.
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
The Fund is a separate entity for federal income tax purposes. Skyline
intends for the Fund to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. To qualify, the Fund must meet
certain income, distribution and diversification requirements. In any year in
which the 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.
GENERAL INFORMATION
CUSTODIAN AND TRANSFER AGENT. Firstar Bank Milwaukee, P.O. Box 701,
Milwaukee, Wisconsin 53201, acts as Custodian of the securities and other assets
of Skyline. As Custodian, Firstar Bank Milwaukee is responsible for, among other
things, safeguarding and controlling Skyline's cash and securities, handling the
receipt and delivery of securities, and collecting
15
<PAGE>
interest and dividends on Skyline's investments. Firstar Mutual Fund Services,
LLC performs transfer agent and portfolio accounting services for the Fund.
Firstar Bank Milwaukee and Firstar Mutual Fund Services, LLC are not affiliates
of the Adviser or its affiliates.
INDEPENDENT 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 the Fund.
DISTRIBUTOR. The shares of the Fund are offered for sale on a continuous
basis through Fund Distributor, Inc. ("Distributor"), without any sales
commissions or charges to the Fund 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 Fund, all expenses in connection with registration of shares of
the Fund 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.
As agent, the Distributor offers shares of the 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 Fund's 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 Fund. Those amounts, if any, are described under "Portfolio Transactions and
Brokerage."
The Distributor is a selling agent for two series of Firstar Fund, 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 Fund
through the exchange privilege described in the Prospectus.
16
<PAGE>
FINANCIAL STATEMENTS
- - PORTFOLIO HOLDINGS AS OF DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 4.9%
AUTO RELATED - 0.8%
Delco Remy International, Inc.(a) Starters & alternators 216,200 $ 1,783,650
OTHER TRANSPORTATION - 1.4%
Interpool, Inc. Container leasing firm 418,100 3,109,619
TRUCKING - 2.7%
Landstar System, Inc.(a) Truckload carrier 139,500 5,972,344
------------
TOTAL AUTOS & TRANSPORTATION 10,865,613
CONSUMER DISCRETIONARY - 30.7%
APPAREL/TEXTILES - 3.9%
Kellwood Co. Apparel manufacturer 294,800 5,730,175
Warnaco Group, Inc. (The) Apparel manufacturer 238,900 2,941,456
------------
8,671,631
COMMERCIAL SERVICES - 9.0%
ADVO, Inc.(a) Direct mail marketer 235,400 5,590,750
Burns International Services Security services 243,100 2,628,519
Corp.(a)
Daisytek International Corp.(a) Distributes computer 97,700 2,277,631
supplies
G&K Services, Inc. Uniform rental 71,600 2,318,050
Interim Services Inc.(a) Staffing provider 78,500 1,942,875
New England Business Business forms 206,200 5,039,013
------------
19,796,838
CONSUMER PRODUCTS/SERVICES - 3.4%
Polaris Industries Inc. Snowmobiles, ATVs, 142,900 5,180,125
motorcycles
School Specialty, Inc.(a) Non-textbook school supplies 146,500 2,215,812
------------
7,395,937
RESTAURANTS - 5.1%
Brinker International, Inc.(a) Casual dining 9,200 221,950
IHOP Corp.(a) Casual dining 218,000 3,637,875
NPC International, Inc.(a) Pizza Hut franchisee 199,100 1,567,913
O'Charley's Inc.(a) Casual dining 277,050 3,636,281
Ruby Tuesday, Inc. Casual dining 123,500 2,246,156
------------
11,310,175
RETAIL - 9.3%
Aaron Rents, Inc. Furniture rental chain 233,600 4,146,400
CSK Auto Corp.(a) DIY auto parts chain 191,800 3,356,500
Discount Auto Parts, Inc.(a) Auto parts stores 212,800 3,843,700
Finlay Enterprises, Inc.(a) Leased jewelry departments 183,100 2,654,950
MarineMax, Inc.(a) Recreational boats 167,500 1,591,250
ShopKo Stores, Inc.(a) Specialty discount retailer 97,700 2,247,100
Tractor Supply Co.(a) Farm-related products 163,900 2,622,400
------------
20,462,300
------------
TOTAL CONSUMER DISCRETIONARY 67,636,881
</TABLE>
17
<PAGE>
- - PORTFOLIO HOLDINGS AS OF DECEMBER 31, 1999 (CONTINUED)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
CONSUMER STAPLES - 2.4%
CONSUMER STAPLES - 2.4%
International Home Foods, Inc.(a) Packaged-foods manufacturer 155,900 $ 2,708,763
International Multifoods Corp. Foodservice distribution 186,700 2,473,775
------------
5,182,538
FINANCIAL SERVICES - 22.7%
BANKS/THRIFTS - 6.6%
BancWest Corp. Commercial bank 258,200 5,034,900
Chittenden Corporation Vermont-based commercial 109,900 3,255,788
bank
Colonial BancGroup, Inc. (The) Alabama bank 312,300 3,240,112
East West Bancorp, Inc. Commercial bank 260,900 2,984,044
------------
14,514,844
INSURANCE - 10.3%
CNA Surety Corp. Surety insurance 198,900 2,585,700
Delphi Financial Group, Inc.(a) Accident & health insurance 155,988 4,679,663
Financial Security Assurance Municipal bond insurance 94,200 4,910,175
Holdings
Gallagher & Co. (Arthur J.) Insurance broker 99,400 6,436,150
StanCorp Financial Group, Inc. Disability insurance 164,600 4,145,862
------------
22,757,550
OTHER FINANCIAL SERVICES - 5.8%
Heller Financial, Inc. Commercial finance 259,700 5,210,232
Neuberger Berman Inc.(a) Investment manager 116,800 2,905,400
Raymond James Financial, Inc. Investment services 245,900 4,595,256
------------
12,710,888
------------
TOTAL FINANCIAL SERVICES 49,983,282
HEALTH CARE - 6.3%
HEALTH CARE SERVICES - 2.1%
AmeriPath, Inc.(a) Physician practice 277,400 2,271,212
management
Manor Care, Inc.(a) Nursing home operator 153,600 2,457,600
------------
4,728,812
MEDICAL EQUIPMENT/PRODUCTS - 4.2%
DENTSPLY International Inc. Dental products manufacturer 92,200 2,178,225
Invacare Corp. Home health care products 235,800 4,730,738
Wesley Jessen VisionCare, Inc.(a) Contact lense manufacturer 62,000 2,348,250
------------
9,257,213
------------
TOTAL HEALTH CARE 13,986,025
</TABLE>
18
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
MATERIALS & PROCESSING - 10.0%
BUILDING/CONSTRUCTION PRODUCTS - 6.3%
Barnett Inc.(a) Hardware products 225,100 $ 2,335,412
Chicago Bridge & Iron Co. Maker of steel tanks 287,700 3,955,875
Dayton Superior Corp.(a) Concrete accessories 169,400 2,752,750
Jacobs Engineering Group Inc.(a) Engineering and construction 151,700 4,930,250
------------
13,974,287
METAL FABRICATIONS - 1.2%
Shaw Group Inc.(a) Pipe fabricator 102,800 2,602,125
PACKAGING/PAPER - 2.5%
Albany International Corp.(a) Paper machine clothing 274,543 4,255,412
BWAY Corp.(a) Metal cans/containers 193,500 1,185,188
------------
5,440,600
------------
TOTAL MATERIALS & PROCESSING 22,017,012
PRODUCER DURABLES - 14.9%
DIVERSIFIED MANUFACTURING - 2.2%
Applied Power Inc. Industrial products manufacturer 72,100 2,649,675
Pentair, Inc. Diversified manufacturer 61,000 2,348,500
------------
4,998,175
ELECTRICAL EQUIPMENT/PRODUCTS - 3.0%
Baldor Electric Company Motor manufacturer 72,600 1,315,875
Belden Inc. Wire & cable manufacturer 247,100 5,189,100
------------
6,504,975
OTHER PRODUCER DURABLES - 9.7%
IDEX Corp. Specialty pump products 223,200 6,779,700
Kaydon Corp. Custom engineered parts 198,800 5,330,325
LSI Industries Inc. Lighting/graphics products 171,800 3,715,175
MSC Industrial Direct Co. Inc.(a) Direct marketer of industrial
products 239,800 3,177,350
Snap-on Inc. Professional tools 85,600 2,273,750
------------
21,276,300
------------
TOTAL PRODUCER DURABLES 32,779,450
TECHNOLOGY - 6.5%
DISTRIBUTION - 2.8%
Arrow Electronics, Inc.(a) Distributes electronic components 245,800 6,237,175
ELECTRONIC COMPONENTS - 1.1%
Tektronix, Inc. Electronic measurement products 60,600 2,355,825
OTHER TECHNOLOGY - 1.3%
Pomeroy Computer Resources, Inc.(a) Computer products reseller 88,900 1,177,925
PSC Inc.(a) Bar coding equipment 221,100 1,630,612
------------
2,808,537
</TABLE>
19
<PAGE>
- - PORTFOLIO HOLDINGS AS OF DECEMBER 31, 1999 (CONTINUED)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
SERVICES - 1.3%
American Management Systems Inc.(a) Information technology service
provider 61,000 $ 1,913,875
CACI International Inc.(a) Technology services provider 42,700 966,087
------------
2,879,962
------------
TOTAL TECHNOLOGY 14,281,499
------------
TOTAL COMMON STOCKS - 98.4%
(Cost $221,716,334) 216,732,300
MONEY MARKET INSTRUMENTS(b)
Yield 6.043% to 6.160%
due February 2000 to April 2000
American Family Financial Services 870,000
General Mills, Inc. 568,929
Pitney Bowes Credit Corp. 865,663
Sara Lee 561,252
Warner Lambert Corp. 1,829,325
Wisconsin Corp. Credit Union 3,037,716
Wisconsin Electric 46,635
------------
TOTAL MONEY MARKET INSTRUMENTS - 3.5%
(Cost $7,779,520) 7,779,520
------------
TOTAL INVESTMENTS - 101.9%
(Cost $229,495,854) 224,511,820
OTHER LIABILITIES LESS OTHER ASSETS - (1.9%) (4,165,915)
------------
NET ASSETS - 100.0% $220,345,905
============
</TABLE>
(a) Non-income producing security.
(b) Variable rate demand notes. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on December 31, 1999.
Based on cost of investments for federal income tax purposes of $229,495,854 on
December 31, 1999, net unrealized depreciation was $4,984,034, consisting of
gross unrealized appreciation of $21,239,718 and gross unrealized depreciation
of $26,223,752.
See accompanying notes to financial statements.
20
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $229,495,854) $224,511,820
Receivable for:
Securities sold $3,077,850
Fund shares sold 127,527
Dividends and interest 266,715 3,472,092
---------- ------------
Total assets 227,983,912
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $4,199,832
Fund shares redeemed 3,149,380
Comprehensive management fee 288,795 7,638,007
---------- ------------
Net assets applicable to shares outstanding $220,345,905
============
Shares outstanding--no par value
(unlimited number of shares authorized) 13,856,364
============
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 15.90
============
ANALYSIS OF NET ASSETS
Paid-in capital $258,829,967
Accumulated net realized loss on sales of
investments (33,500,028)
Net unrealized depreciation of investments (4,984,034)
------------
Net assets applicable to shares outstanding $220,345,905
============
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 2,977,093
Interest 1,167,044
------------
Total investment income 4,144,137
Expenses:
Comprehensive management fee 5,246,839
Fees to unaffiliated trustees 22,911
------------
Total expenses 5,269,750
------------
Net investment loss (1,125,613)
Net realized and unrealized loss on investments:
Net realized loss on sales of investments (33,501,167)
Net change in net unrealized appreciation or depreciation (20,304,001)
------------
Net realized and unrealized loss on investments (53,805,168)
------------
Net decrease in net assets resulting from operations $(54,930,781)
============
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/99 12/31/98
------------- ------------
<S> <C> <C>
From operations:
Net investment loss $ (1,125,613) $(2,391,833)
Net realized (loss) gain on sales of
investments (33,501,167) 23,823,435
Net change in net unrealized appreciation or
depreciation (20,304,001) (58,687,760)
------------- ------------
Net decrease in net assets resulting from
operations (54,930,781) (37,256,158)
Distributions to shareholders from net
realized gains (17,030,328) (7,028,589)
From fund share transactions:
Proceeds from fund shares sold 95,398,045 144,759,773
Reinvestment of capital gain distribution 16,679,785 6,858,335
Payments for fund shares redeemed (264,794,438) (129,379,429)
------------- ------------
Net (decrease) increase in net assets
resulting from share transactions (152,716,608) 22,238,679
------------- ------------
Total decrease in net assets (224,677,717) (22,046,068)
Net assets at beginning of year 445,023,622 467,069,690
------------- ------------
Net assets at end of year $ 220,345,905 $445,023,622
============= ============
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
<S> <C> <C> <C> <C> <C>
----------------------------------------------------
Net asset value at
beginning of year $ 19.78 $ 21.66 $ 18.16 $ 16.79 $ 15.64
-------- -------- -------- -------- --------
Income from Investment Operations
Net investment loss (0.14) (0.11) (0.07) (0.04) (0.06)
Net realized and unrealized gain
(loss) on investments (2.51) (1.45) 6.46 5.02 2.21
-------- -------- -------- -------- --------
Total from investment
operations (2.65) (1.56) 6.39 4.98 2.15
-------- -------- -------- -------- --------
Less distributions from net realized
gains on investments (1.23) (0.32) (2.89) (3.61) (1.00)
-------- -------- -------- -------- --------
Net asset value at end of year $ 15.90 $ 19.78 $ 21.66 $ 18.16 $ 16.79
======== ======== ======== ======== ========
Total Return (13.28%) (7.17%) 35.43% 30.37% 13.83%
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.48% 1.47% 1.48% 1.51% 1.51%
Ratio of net investment loss to
average net assets (0.32%) (0.50%) (0.41%) (0.32%) (0.35%)
Portfolio turnover rate 81% 68% 62% 130% 71%
Net assets, end
of year (in thousands) $220,346 $445,024 $467,070 $219,480 $174,899
======== ======== ======== ======== ========
</TABLE>
Effective August 31, 1995, the Fund's Investment Adviser changed from Mesirow
Asset Management, Inc., to Skyline Asset Management, L.P.
See accompanying notes to financial statements.
24
<PAGE>
- -NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------
Skyline Funds is an open-end, diversified investment management company which
consists of Special Equities Portfolio, Small Cap Value Plus (formerly Special
Equities II), and Small Cap Contrarian. The Funds commenced public offering of
their shares as follows: Special Equities Portfolio on April 23, 1987, Small Cap
Value Plus 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 and opened to new investors on October 27,
1999.
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 an
independent pricing service. Variable rate demand notes with sixty days or less
to maturity are valued at amortized cost which approximates 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 an 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 that 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 AND DIVIDENDS TO SHAREHOLDERS - It is the Fund's policy
to comply with the special provisions of the Internal Revenue Code applicable to
regulated investment companies and, in the manner provided therein, to
distribute all of its taxable income to shareholders. Such provisions were
complied with and, therefore, no federal income taxes have been accrued.
As of December 31, 1999, the Fund had capital loss carryforwards of $16,805,761.
This loss may be used to offset future capital gains arising in tax years
through 2007.
Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date. Dividends are determined in accordance with tax principles
which may treat certain transactions differently from generally accepted
accounting principles.
25
<PAGE>
- -NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------
/ / EXPENSES - Expenses arising in connection with a particular fund are
allocated to that fund. Other expenses of the Skyline Funds, such as trustees'
fees, are allocated proportionately among the three funds comprising Skyline
Funds.
/ / LINE OF CREDIT - The Funds share in a $10 million ($3 million committed)
revolving credit facility for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Adviser pays a commitment fee of 10 basis points
per annum of the average daily unutilized portion of the committed line of
credit. Under the terms of the credit agreement, interest on each loan would be
fixed at the prime rate less 150 basis points. There were no borrowings under
this agreement during the year ended December 31, 1999.
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, 1999 was $5,246,839.
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, 1999, the Fund paid fees of $22,911 to its
unaffiliated trustees.
3
FUND SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statements of changes in net assets
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/99 12/31/98
---------------------------
<S> <C> <C>
Shares sold 5,235,896 6,883,008
Shares issued for reinvestment of dividends 1,065,801 354,028
------------ ------------
6,301,697 7,237,036
Less shares redeemed (14,941,529) (6,307,941)
------------ ------------
Net (decrease) increase in shares
outstanding (8,639,832) 929,095
============ ============
</TABLE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1999, were as follows:
<TABLE>
<S> <C>
Cost of purchases $271,171,871
Proceeds from sales 413,554,957
</TABLE>
26
<PAGE>
- ------------------------------------------------------------------------
5
SUBSEQUENT EVENT
A special meeting of Shareholders of Skyline Small Cap Value Plus and Skyline
Small Cap Contrarian is scheduled to be held on Tuesday, February 29, 2000. The
purpose of the special meeting is to approve the Plan of Reorganization (the
"Plan"), which was previously approved by Skyline Funds' Board of Trustees. The
proposed Plan provides for the acquisition of the assets and assumption of the
liabilities of Skyline Small Cap Value Plus and Skyline Small Cap Contrarian by
Skyline Special Equities, in exchange solely for shares of Skyline Special
Equities.
27
<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, 1999, 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 auditing standards generally accepted
in the United States. 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, 1999 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, 1999, 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 accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
January 31, 2000
28
