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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-5022
Skyline Funds
311 South Wacker Drive, Suite 4500
Chicago, IL 60606
William M. Dutton Alan Goldberg
Skyline Funds Bell, Boyd & Lloyd LLC
311 South Wacker Drive, Suite 4500 Three First National Plaza, #3100
Chicago, IL 60606 Chicago, IL 60602
(Name and address of agents for service)
Registrant's telephone number, including area code: (312) 913-0900
Date of fiscal year end: 12/31/04
Date of reporting period: 06/30/05
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ITEM 1. REPORT TO SHAREHOLDERS.
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SEMI-ANNUAL REPORT -- JUNE 30, 2005
SKYLINE SPECIAL
EQUITIES PORTFOLIO
[GRAPHIC]
[SKYLINE FUNDS LOGO]
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COMMENTARY
June 30, 2005
OVERVIEW
The Fund generated a gain of 3.67% for the second quarter, compared to a 4.32%
gain for the Russell 2000 Index and a gain of 5.07% for the Russell 2000 Value
Index. For the first six months of 2005, the Fund rose 2.44%, compared to a
return of -1.25% for the Russell 2000 Index and a 0.89% rise for the Russell
2000 Value Index. During the second quarter, stock prices rebounded from their
weak first quarter performance with nearly all sectors posting positive returns.
Stocks reacted positively to a decline in long term interest rates and to
economic data released during the quarter indicating that the U.S. economy
remained healthy. The Fund's solid gain for the quarter modestly trailed its
benchmarks, due to its relatively low exposure to high dividend paying stocks,
which were among the best performing stocks for the period. Year to date, the
Fund remained ahead of its benchmarks due primarily to strong stock selection.
MARKET REVIEW
Stocks rebounded in the second quarter, as indicated by the 4.32% increase for
the Russell 2000 Index, the 5.07% increase for the Russell 2000 Value Index, and
the 1.36% rise for the S&P 500 Index. The second quarter gains helped to offset
some of the losses generated by stocks during the first quarter of the year,
resulting in year-to-date returns of -1.25% for the Russell 2000 Index, 0.89%
for the Russell 2000 Value Index, and -0.82% for the S&P 500 Index. The rebound
in stock prices occurred as several of the factors that were causes for concern
in the first quarter, including rising long term interest rates and a slowing
economy, appeared to reverse themselves in the second quarter. The yield on the
U.S. 10-Year Treasury Bond, which started the year at 4.22%, rose to 4.50% by
the first quarter's end, and subsequently fell to 3.94% by the end of the second
quarter. ISM's Purchasing Manager's Index, which is considered a good barometer
of the industrial economy, rose in June from May, reversing a string of six
consecutive monthly declines, while the Conference Board's Consumer Confidence
Index reversed three straight monthly declines by rising in both May and June.
Since the Fed began raising rates in June of 2004, the federal funds rate has
increased from 1.00% to 3.25%, while the 10-Year Treasury Bond has declined from
4.69% to 3.94%. In testimony to Congress earlier this year, Federal Reserve
Chairman Alan Greenspan stated that typically, long term interest rates rise in
response to increases in short term rates. Therefore, the most recent
experience, in which long term interest rates have declined in response to an
increase in short term interest rates, was a "conundrum." This "conundrum" has
rendered the Fed's attempt to move to a less accommodative monetary policy
ineffective. The decline in long-term rates has lowered most borrowing rates,
including mortgage rates, which has propped up housing prices, allowing
homeowners to continue to monetize the equity in their homes to support consumer
spending.
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Small cap value stock price gains were broad based during the second quarter.
Within the Russell 2000 Value Index, every sector but one posted gains. The two
sectors that contributed most to the Index's gain during the quarter were
financial services and utilities. High dividend yielding stocks performed well
during the quarter as investors searched for yields in a persistently low
interest rate environment. Financial services stocks, particularly REITs, and
utilities stocks typically have higher yields than the average stock. The one
sector that posted a decline in the second quarter was the materials and
processing sector. Materials and processing stocks had been strong performers
over the last several quarters due to rising commodities prices, but that
situation reversed itself during the second quarter.
For the first six months of the year, the most positive contributors to the
Russell 2000 Value Index were the other energy sector, due to higher oil and gas
prices, and utilities, due to increased investor demand for high yielding stocks
and an increase in merger and acquisition activity in the sector. The largest
detractors from the Index's performance were technology stocks, due to continued
concerns about near-term fundamentals, and materials and processing stocks, due
to the recent downturn in commodity prices.
PORTFOLIO REVIEW
In the second quarter, the financial services and consumer discretionary sectors
contributed most to the Fund's performance, due to their positive returns and
heavy weightings within the Fund. The materials and processing sector was the
only sector to detract from the Fund's performance. Although the Fund had
relatively low exposure to the more commodity-oriented companies that performed
poorly during the quarter, Cytec Industries, one of the larger holdings in that
sector, suffered from an earnings disappointment, detracting from the Fund.
When comparing the returns of the Fund to the Russell 2000 Value Index during
the quarter, relatively good stock selection was offset by a significant
underweighting in high dividend yielding stocks such as REITs and utilities.
REITs and utilities have historically been unable to grow their earnings at
above average rates, and therefore typically make up a relatively small portion
of the Fund. Also, we are concerned about the relatively high valuations these
sectors have recently attained. Among the individual stocks that contributed
most positively to the Fund's performance were two companies that posted better
than expected earnings results, Westcorp Inc., an originator of automobile
loans, and Asset Acceptance Capital Corp., a purchaser of charged-off debt. In
addition, School Specialty Inc., a supplier of non-textbook supplies to schools,
rose due to the announcement of a buyout offer at a significant premium to the
price at which the stock was trading at that time.
Year to date, the consumer discretionary sector contributed most to the Fund's
performance, due to its positive returns and heavy weighting in the Fund. The
health care sector was also a major contributor to the Fund's return for the
first six months of the year. Although the sector makes up a relatively small
portion of the Fund, the strong performance of health care stocks in the Fund
made it the second largest contributor to the Fund's return. The technology,
materials and processing, and producer durables sectors detracted from the
Fund's performance. These sectors were among the worst
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performing in the stock market in the first half of the year. When comparing the
Fund's return to the Russell 2000 Value Index for the first six months of the
year, the previously mentioned consumer discretionary and health care sectors
were the most positive contributors. The largest detractors from performance
relative to the Index over the same period were the other energy and utilities
sectors, two strong performing areas of the market in which the Fund was
underweighted.
OUTLOOK
We would characterize the last several years as a classic small cap value cycle.
Small cap value stocks were quite weak in 2002 in response to the struggling
U.S. economy and a high level of risk aversion among investors. In 2003, stocks
responded positively to evidence that the U.S. economy was no longer getting
worse and expectations that the Fed's accommodative monetary policy would
eventually lead to a more robust economic environment. During this early phase
of the bull market, the smallest and riskiest stocks performed best, as
investors were less fearful that these companies might go out of business. As
the economy improved through 2004, earnings rebounded and drove further stock
price gains. During this phase of the cycle, commodity-related stocks, such as
energy and materials companies, which are most sensitive to an improvement in
the economy, performed best. More recently, as the Fed continues to tighten
monetary policy, investors are faced with the question -- "Will the Fed get it
right and dampen inflationary pressures without choking off the economy, or will
they overshoot and send the economy into a recession?"
Although we see no evidence that the Fed's moves have dramatically slowed the
economy, it is clear that we are beyond the early stages of the recovery when
the economy grows the fastest. We have in recent years focused on stocks that
are at the larger end of the small cap stock spectrum and believe that this
focus will benefit from the current environment. These stocks are typically
better established and have more stable businesses than the smallest of the
small cap stocks and are less reliant on a rapidly accelerating economy for
continued earnings growth. In fact, the stocks in the Fund held up much better
in the weak stock market environment in the first several months of this year.
With an average P/E for our stocks currently at 16.3x trailing 12-month
earnings, and expectations for strong double digit earnings growth over the next
12 months, we are optimistic about the outlook for the Fund.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE PERFORMANCE DATA QUOTED
REPRESENTS PAST PERFORMANCE AND CURRENT RETURNS MAY BE LOWER OR HIGHER. THE
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST. TO
OBTAIN PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH END, PLEASE
VISIT skylinefunds.com. THE PERFORMANCE FOR THE ONE, THREE, FIVE AND TEN YEARS
ENDED JUNE 30, 2005, AND FOR THE PERIOD APRIL 23, 1987 (INCEPTION) THROUGH JUNE
30, 2005, IS AN AVERAGE ANNUAL RETURN CALCULATION.
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
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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 the United States. The Russell 2000 Growth Index is
an unmanaged index measuring the performance of those Russell 2000 companies
with higher price-to-book ratios and higher forecasted growth rates. The Dow
Jones Industrial Average is an average of the stock prices of 30 major
corporations in the United States. All figures take into account reinvested
dividends. You cannot invest directly in an index.
Sources: Frank Russell Company and FactSet.
There are risks of investing in a fund that invests in stocks of small sized
companies, which tend to be more volatile and less liquid than stocks of large
cap companies. There are also risks in investing in value-oriented stocks,
including the risk that value-oriented stocks will underperform growth-oriented
stocks during some periods.
The discussion of the Fund's investments and investment strategy represent the
views of Skyline Asset Management, L.P., the Fund's investment adviser, at the
time of this report. The Fund's investments are subject to change and should not
be considered a recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
Distributor: Managers Distributors, Inc., member NASD.
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PERFORMANCE (%)
<Table>
<Caption>
2Q YTD SINCE
2005* 2005* 1 YR 3 YRS 5 YRS 10 YRS INCEPTION**
SPECIAL EQUITIES 3.67 2.44 13.73 12.21 15.42 12.88 14.11
RUSSELL 2000 VALUE 5.07 0.89 14.38 14.15 16.11 13.89 12.33
RUSSELL 2000 4.32 -1.25 9.45 12.81 5.70 9.90 9.54
S&P 500 1.36 -0.82 6.30 8.27 -2.38 9.94 10.70
</Table>
<Table>
<Caption>
HISTORICAL SPECIAL RUSSELL RUSSELL
PERFORMANCE EQUITIES 2000 VALUE 2000 S&P 500
2004 16.6 22.3 18.3 10.9
2003 40.7 46.0 47.3 28.7
2002 -7.3 -11.4 -20.5 -22.1
2001 13.9 14.0 2.5 -11.9
2000 24.2 22.8 -3.0 -9.2
1999 -13.3 -1.5 21.3 21.1
1998 -7.2 -6.5 -2.6 28.8
1997 35.4 31.8 22.4 33.4
1996 30.4 21.4 16.5 23.3
1995 13.8 25.8 28.4 37.5
1994 -1.2 -1.6 -1.8 1.3
1993 22.9 23.8 18.9 10.0
1992 42.5 29.1 18.4 7.7
1991 47.4 41.7 46.1 30.6
1990 -9.3 -21.8 -19.5 -3.2
1989 24.0 12.4 16.2 31.4
1988 29.7 29.5 24.9 16.5
1987** -16.9 -21.5 -24.3 -12.0
</Table>
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE PERFORMANCE DATA QUOTED
REPRESENTS PAST PERFORMANCE AND CURRENT RETURNS MAY BE LOWER OR HIGHER. THE
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST. TO
OBTAIN PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH END, PLEASE
VISIT skylinefunds.com. THE PERFORMANCE FOR
5
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THE ONE, THREE, FIVE AND TEN YEARS ENDED JUNE 30, 2005, AND FOR THE PERIOD APRIL
23, 1987 (INCEPTION) THROUGH JUNE 30, 2005, IS AN AVERAGE ANNUAL RETURN
CALCULATION.
The table does not reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares.
* Not annualized.
** Return is calculated from the Fund's inception on April 23, 1987. The
Russell 2000 Value performance reflects an inception date of May 1, 1987.
6
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PORTFOLIO CHARACTERISTICS
<Table>
<Caption>
SPECIAL RUSSELL 2000
EQUITIES VALUE RUSSELL 2000 S&P 500
P/E RATIO (EXCLUDING NEGATIVE EARNINGS) 16.3x 16.6x 19.1x 17.1x
PRICE/BOOK 1.91 1.64 2.19 2.8
PRICE/SALES 0.84 0.83 1.04 1.48
EPS GROWTH--3 YRS (HISTORICAL) 19.4% 6.8% 11.4% 16.4%
EPS GROWTH--1 YR (FORECASTED) 14.0% 10.1% 14.4% 12.4%
MARKET CAP $ WEIGHTED MEDIAN $1.1 billion $974 million $972 million $48.8 billion
ASSETS $521 million
NUMBER OF HOLDINGS 75
TICKER SYMBOL: SKSEX
CUSIP: 830833208
NET ASSET VALUE (PER SHARE): $29.34
MINIMUM INITIAL INVESTMENT: $1,000
MINIMUM SUBSEQUENT INVESTMENT: $100
</Table>
TOP TEN HOLDINGS
<Table>
<Caption>
% OF NET ASSETS
---------------
CBRL GROUP, INC.
Family dining 2.6%
WESTCORP
Auto finance 2.5%
AIRGAS, INC.
Gas distributor 2.3%
SCHOOL SPECIALTY, INC.
Non-textbook school supplies 2.3%
DAVITA INC.
Provider of dialysis services 2.1%
ISTAR FINANCIAL INC.
Commercial real estate lender 1.9%
CYTEC INDUSTRIES INC.
Specialty chemicals 1.9%
BORDERS GROUP, INC.
Book retailer 1.9%
AMERUS GROUP CO.
Life insurer 1.8%
LAIDLAW INTERNATIONAL, INC.
Provider of transportation services 1.8%
TOP TEN HOLDINGS 21.1%
</Table>
Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
7
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SECTOR PERFORMANCE (%) (as of June 30, 2005)
2Q 2005**
<Table>
<Caption>
RUSSELL
SPECIAL 2000 RUSSELL
EQUITIES VALUE 2000
Health Care 8.9 9.7 8.7
Financial Services 8.2 8.6 7.5
Other Energy 6.2 5.7 6.3
Autos And Transportation 4.4 4.7 1.5
Consumer Discretionary 4.1 3.3 3.2
Technology 4.0 1.3 0.3
Producer Durables 2.4 2.7 4.4
Materials And Processing -4.6 -3.9 -4.5
Consumer Staples NA* 7.6 8.2
Integrated Oils NA* 40.1 15.3
Other NA* 5.8 4.0
Utilities NA* 10.2 10.8
</Table>
YTD 2005**
<Table>
<Caption>
RUSSELL
SPECIAL 2000 RUSSELL
EQUITIES VALUE 2000
Health Care 23.1 1.0 -1.7
Other Energy 21.2 18.0 20.2
Consumer Discretionary 8.2 2.4 1.9
Autos And Transportation 4.2 -6.3 -9.5
Producer Durables 0.7 -1.2 -3.3
Financial Services -0.3 0.5 -1.3
Technology -2.9 -11.6 -11.5
Materials And Processing -3.2 -4.3 -6.1
Consumer Staples NA* 8.2 8.5
Integrated Oils NA* 35.8 18.9
Other NA* 12.9 10.1
Utilities NA* 12.5 12.4
</Table>
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE PERFORMANCE DATA QUOTED
REPRESENTS PAST PERFORMANCE AND CURRENT RETURNS MAY BE LOWER OR HIGHER. THE
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST. TO
OBTAIN PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH END, PLEASE
VISIT skylinefunds.com.
* Not applicable ** Not annualized
[CHART]
SECTOR WEIGHTINGS (as of June 30, 2005)
<Table>
Autos & Transportation 9.5%
Cash 3.5%
Consumer Discretionary 22.0%
Financial Services 25.3%
Health Care 3.4%
Materials & Processing 10.4%
Other Energy 2.8%
Producer Durables 9.9%
Technology 13.2%
</Table>
Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
8
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STOCK HIGHLIGHTS
AFTERMARKET TECHNOLOGY CORP. (ATAC)
ATAC is the largest remanufacturer of transmissions in North America. Auto
manufacturers pay ATAC to remanufacture transmissions which they send to their
dealers for warranty repairs. Don Johnson, ATAC's CEO, came to the company in
early 2004, and has reinvigorated management to focus on growth opportunities.
He has extensive experience in the industry, working for Caterpillar and Ford.
Prior to his arrival, ATAC didn't have an organized marketing effort. He
believes ATAC has the ability to gain additional customers, increase volume with
existing customers, and enter new markets (such as the truck and marine
markets), all of which should drive future revenue and earnings growth. Early
evidence is positive, as ATAC has won some new customers in the last year.
ATAC's stock is attractive, trading at a low teens P/E multiple, and should grow
its earnings per share at a low double-digit rate.
DREW INDUSTRIES INCORPORATED (DW)
DW is a leading national supplier of a wide variety of components for
recreational vehicles and manufactured homes. DW's emphasis on efficient,
low-cost manufacturing and customer service, as well as its broad product
portfolio and national coverage (with 50 production facilities), make it an
attractive partner for its customers. In recent years, DW has acquired a number
of small companies with key technologies. These acquisitions, along with
internal research and development efforts, have brought about a large number of
new and innovative products. DW's national footprint has enabled broad
distribution of these products, which in turn has translated into significant
market share gains, and strong sales and earnings growth. Future growth
opportunities appear to be vast. In addition to a very strong pipeline of new
products which should drive several years of strong growth, the company has
begun a heightened focus on the motorized segment of the RV business where its
market shares are far below those of its core towable RV offerings. Despite the
encouraging growth prospects, DW continues to trade at a modest valuation.
Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
9
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GLOSSARY OF INVESTMENT TERMS
EARNINGS PER SHARE (EPS) A company's net income divided by its outstanding
shares.
EARNINGS PER SHARE GROWTH -- 3 YRS (HISTORICAL) The compounded annual growth
rate of a company's EPS over the last 3 years.
EARNINGS PER SHARE GROWTH -- 1 YR (FORECASTED) Analysts' consensus forecast for
a company's growth in operating EPS over the immediate future 12 months.
MARKET CAP DOLLAR WEIGHTED MEDIAN An indicator of the size of companies in which
a fund invests; the mid-point of market capitalization (market price times
shares outstanding) of a fund's stocks, weighted by the proportion of the fund's
assets invested in each stock. Stocks representing half of the fund's assets
have market capitalizations above the median, and the rest below it.
PRICE/BOOK RATIO The share price of a stock divided by its net worth, or book
value, per share.
PRICE/EARNINGS (P/E) RATIO The ratio of a stock's current price to its per-share
earnings over the past 12 months. For a fund, the price/earnings ratio is the
weighted average P/E of the stocks in that fund. P/E is an indicator of market
expectations about corporate prospects.
PRICE/SALES RATIO The ratio of a stock's current price to its per-share revenue
over the past 12 months.
10
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PORTFOLIO HOLDINGS as of June 30, 2005
<Table>
<Caption>
COMPANY NUMBER MARKET
DESCRIPTION SHARES VALUE
------------------------------ -------------- --------------
COMMON STOCKS
AUTOS & TRANSPORTATION -- 9.5%
OTHER TRANSPORTATION -- 5.9%
Drew Industries Incorporated(a) Supplier to RVs and
manufactured housing 153,800 $ 6,982,520
Fleetwood Enterprises, Inc(a) Manufactured housing and
RV manufacturer 349,400 3,546,410
Interpool, Inc. Container leasing firm 295,800 6,324,204
Laidlaw International, Inc.(a) Provider of transportation
services 390,900 9,420,690
Ryder System, Inc. Truck leasing company 128,100 4,688,460
--------------
30,962,284
RAILROAD -- 1.2%
Pacer International, Inc. Rail logistics firm 277,200 6,040,188
TRUCKING -- 1.3%
Swift Transportation Co., Inc.(a) Truckload carrier 293,500 6,835,615
AUTOS -- 1.1%
Aftermarket Technology Corp.(a) Provider of remanufactured
transmissions 322,400 5,619,432
--------------
TOTAL AUTOS & TRANSPORTATION 49,457,519
CONSUMER DISCRETIONARY -- 22.0%
COMMERCIAL SERVICES -- 6.0%
Hudson Highland Group, Inc. Professional staffing 308,800 4,814,192
ProQuest Company(a) Information content provider 273,800 8,977,902
Source Interlink Companies, Inc.(a) Distributor of magazines 232,100 2,871,077
United Stationers Inc.(a) Office products distributor 165,400 8,121,140
Watson Wyatt & Company Holdings Benefit consulting company 236,900 6,071,747
--------------
30,856,058
CONSUMER PRODUCTS/SERVICES -- 5.0%
Gildan Activewear Inc.(a) T-shirt manufacturer 272,300 7,175,105
School Specialty, Inc.(a) Non-textbook school supplies 253,503 11,787,889
The Scotts Miracle-Gro Company(a) Turf & horticultural products 100,900 7,185,089
--------------
26,148,083
PRINTING/PUBLISHING -- 2.2%
ADVO, Inc. Direct mail marketing
company 202,301 6,443,287
Journal Communications Media communication
Incorporated company 286,500 4,813,200
--------------
11,256,487
RESTAURANTS -- 3.1%
CBRL Group, Inc. Family dining 349,400 13,577,684
The Steak n Shake Company(a) Casual dining 142,800 2,658,936
--------------
16,236,620
</Table>
11
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<Table>
<Caption>
COMPANY NUMBER MARKET
DESCRIPTION SHARES VALUE
------------------------------ -------------- --------------
RETAIL -- 5.7%
Big 5 Sporting Goods Corporation Regional sporting goods
retailer 257,100 $ 7,296,498
Borders Group, Inc. Book retailer 384,300 9,726,633
Linens 'n Things, Inc.(a) Home textiles and
housewares retailer 153,100 3,622,346
The Sports Authority, Inc. Sporting goods retailer 291,100 9,256,980
--------------
29,902,457
--------------
TOTAL CONSUMER DISCRETIONARY 114,399,705
FINANCIAL SERVICES -- 25.3%
BANKS/THRIFTS -- 4.1%
Commercial Capital Bancorp, Inc. Savings Bank 251,500 4,202,565
Prosperity Bancshares, Inc. Regional bank 210,500 6,022,405
Provident Bankshares Corporation Commercial bank 156,100 4,981,151
Sterling Financial Corporation(a) Savings and loan 170,830 6,389,042
--------------
21,595,163
INSURANCE -- 12.6%
Amerus Group Inc. Life insurer 198,000 9,513,900
Aspen Insurance Holdings Limited Property & casualty
insurance 249,200 6,867,952
Clark, Inc.(a) Insurance brokerage and
consulting 279,800 4,009,534
Conseco, Inc.(a) Life & health insurer 344,700 7,521,354
Delphi Financial Group, Inc. Accident & health insurance 213,068 9,406,952
Reinsurance Group of America Life reinsurer 190,100 8,841,551
Scottish Re Group Limited Life reinsurer 354,000 8,580,960
Triad Guaranty Inc.(a) Mortgage insurance 72,130 3,634,631
U.S.I. Holdings Corporation(a) Insurance brokerage 556,953 7,173,555
--------------
65,550,389
OTHER FINANCIAL SERVICES -- 6.7%
Asset Acceptance Capital(a) Collector of charged-off debt 253,900 6,578,549
Investment Technology Group, Inc.(a) Trade execution firm 328,400 6,902,968
MCG Capital Corporation Business development
company 489,100 8,353,828
Westcorp Auto finance 244,200 12,800,964
--------------
34,636,309
REAL ESTATE INVESTMENT TRUSTS -- 1.9%
iStar Financial Inc. Commercial real estate lender 242,200 10,073,098
--------------
TOTAL FINANCIAL SERVICES 131,854,959
HEALTH CARE -- 3.4%
HEALTH CARE SERVICES -- 3.4%
Apria Healthcare Group Inc.(a) Home healthcare service
provider 147,000 5,092,080
Davita Inc.(a) Provider of dialysis services 245,450 11,163,066
Triad Hospitals, Inc.(a) Hospital Operator 28,300 1,546,312
--------------
TOTAL HEALTH CARE 17,801,458
</Table>
12
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<Table>
<Caption>
COMPANY NUMBER MARKET
DESCRIPTION SHARES VALUE
------------------------------ -------------- --------------
MATERIALS & PROCESSING -- 10.4%
BUILDING/CONSTRUCTION PRODUCTS -- 3.4%
Jacuzzi Brands, Inc.(a) Manufacturer of plumbing
products 477,200 $ 5,120,356
NCI Building Systems, Inc.(a) Metal buildings 193,300 6,340,240
York International Corporation Manufacturer of HVAC
products 165,400 6,285,200
--------------
17,745,796
PACKAGING & PAPER -- 1.3%
Albany International Corp. Manufacturer of paper
machine clothing 214,400 6,884,384
SPECIALTY CHEMICALS -- 5.7%
Airgas, Inc. Gas distributor 491,400 12,122,838
Cytec Industries Inc. Specialty chemicals 251,500 10,009,700
Spartech Corp. Plastics producer 412,800 7,347,840
--------------
29,480,378
--------------
TOTAL MATERIALS & PROCESSING 54,110,558
OTHER ENERGY -- 2.8%
EQUIPMENT & SERVICES -- 1.1%
Key Energy Services, Inc.(a) Workover services provider 462,100 5,591,410
EXPLORATION & PRODUCTION -- 1.7%
Newfield Exploration Company(a) Oil and gas producer 223,600 8,919,404
--------------
TOTAL OTHER ENERGY 14,510,814
PRODUCER DURABLES -- 9.9%
RAILROAD -- 0.1%
Trinity Industries, Inc. Railcar manufacturer 9,500 304,285
AEROSPACE -- 1.0%
Curtiss-Wright Corporation Aerospace & defense
components mfg. 93,200 5,028,140
DIVERSIFIED MANUFACTURING -- 2.9%
Carlisle Companies Incorporated Industrial conglomerate 97,800 6,712,014
Crane Co. Industrial conglomerate 321,400 8,452,820
--------------
15,164,834
ELECTRICAL EQUIPMENT -- 4.9%
Acuity Brands, Inc. Manufacturer of lighting
fixtures 302,002 7,758,431
Belden CDT Inc. Networking cable
manufacturer 342,400 7,258,880
Commscope, Inc.(a) Networking cable
manufacturer 375,000 6,528,750
EnerSys Manufacturer of industrial
batteries 286,200 3,900,906
--------------
25,446,967
</Table>
13
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<Table>
<Caption>
COMPANY NUMBER MARKET
DESCRIPTION SHARES VALUE
------------------------------ -------------- --------------
MACHINERY -- 1.0%
Flowserve Corporation(a) Pump & valve manufacturer 170,800 $ 5,168,408
--------------
TOTAL PRODUCER DURABLES 51,112,634
TECHNOLOGY -- 13.2%
DISTRIBUTION -- 1.4%
Scansource, Inc.(a) Distributor of barcode and
telephony products 79,500 3,413,730
Synnex Corporation(a) Distributor of PCs and
peripherals 229,400 4,016,794
--------------
7,430,524
ELECTRONIC COMPONENTS -- 1.4%
Fairchild Semiconductor Int'l., Inc.(a) Semiconductors 510,100 7,523,975
OTHER TECHNOLOGY -- 7.2%
Applied Films Corporation(a) Manufacturer of equipment
to coat glass 213,400 5,463,040
Benchmark Electronics, Inc.(a) Contract manufacturer 284,200 8,645,364
Electronics for Imaging, Inc.(a) Products that support
color printing 308,900 6,499,256
MEMC Electronic Materials, Inc. Manufacturer of silicon
wafers 577,600 9,108,752
NETGEAR, Inc.(a) Manufacturer of networking
equipment 162,300 3,018,780
Park Electrochemical Corporation Advanced electronic materials 190,000 4,788,000
--------------
37,523,192
SERVICES -- 1.0%
Syniverse Holdings(a) Services for wireless carriers 375,000 5,250,000
SOFTWARE -- 2.2%
Mentor Graphics Corporation(a) Provider of EDA software 510,100 5,228,525
eFunds Corporation(a) Provider of EFT software 335,108 6,028,593
--------------
11,257,118
--------------
TOTAL TECHNOLOGY 68,984,809
--------------
TOTAL COMMON STOCKS -- 96.5%
(Cost $401,439,987) 502,232,456
</Table>
14
<Page>
<Table>
<Caption>
MARKET
VALUE
--------------
MONEY MARKET INSTRUMENTS
US Bank Demand Note, 3.08%(b) $ 18,332,899
US Bank Commercial Paper, 3.10%, due 07/01/05 11,600,000
--------------
TOTAL MONEY MARKET INSTRUMENTS -- 5.7%
(Cost $29,932,899) 29,932,899
--------------
TOTAL INVESTMENTS -- 102.2%
(Cost $431,372,886) 532,165,355
OTHER ASSETS LESS LIABILITIES -- (2.2)% (11,544,795)
--------------
NET ASSETS -- 100% $ 520,620,560
==============
</Table>
(a) Non-income producing security.
(b) Variable rate demand note. Interest rate is reset every seven days. Rate
disclosed represents rate in effect on June 30, 2005.
See accompanying notes to financial statements.
15
<Page>
STATEMENT OF ASSETS AND LIABILITIES As of June 30, 2005 (unaudited)
<Table>
ASSETS
Investments, at value (Cost: $431,372,886) $ 532,165,355
Receivable for:
Securities sold $ 1,910,290
Fund shares sold 249,927
Dividends and interest 398,229 2,558,446
---------------
Other assets 187,300
---------------
Total assets 534,911,101
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 12,876,341
Fund shares redeemed 585,464
Comprehensive management fee 621,097
Trustee compensation 20,339
Trustees deferred compensation 187,300 14,290,541
--------------- ---------------
Net assets applicable to shares outstanding $ 520,620,560
===============
Shares outstanding--no par value (unlimited number
of shares authorized) 17,743,480
===============
PRICING OF SHARES
Net asset value, offering price and redemption price
per share $ 29.34
===============
ANALYSIS OF NET ASSETS
Paid-in capital $ 354,366,340
Undistributed net investment loss (1,192,611)
Accumulated net realized gain on sales of investments 66,654,362
Unrealized appreciation of investments 100,792,469
---------------
Net assets applicable to shares outstanding $ 520,620,560
===============
</Table>
See accompanying notes to financial statements.
16
<Page>
STATEMENT OF OPERATIONS For the Period Ended June 30, 2005 (unaudited)
<Table>
Investment income
Dividends $ 1,961,002
Interest 275,237
---------------
Total investment income 2,236,239
Expenses:
Comprehensive management fee 3,770,221
Fees to unaffilliated trustees 41,802
---------------
Total expenses 3,812,023
---------------
Net investment loss (1,575,784)
Net realized and unrealized gain/loss on investments:
Net realized gain on sales of investments 56,301,773
Change in unrealized appreciation (43,299,846)
---------------
Net realized and unrealized gain on investments 13,001,927
---------------
Net increase in net assets resulting from operations $ 11,426,143
===============
</Table>
See accompanying notes to financial statements.
17
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
PERIOD ENDED
6/30/05 YEAR ENDED
(UNAUDITED) 12/31/04
--------------- ---------------
From operations:
Net investment loss $ (1,575,784) $ (2,514,039)
Net realized gain on sales of investments 56,301,773 65,677,157
Change in unrealized appreciation (43,299,846) 18,687,895
--------------- ---------------
Net increase in net assets resulting from operations 11,426,143 81,851,013
Distributions to shareholders from net realized gains -- (65,096,674)
From fund share transactions:
Proceeds from fund shares sold 30,549,304 82,639,085
Reinvestment of dividends -- 63,850,736
Payments for fund shares redeemed (87,711,056) (121,462,995)
--------------- ---------------
Net increase/decrease in net assets resulting
from share transactions (57,161,752) 25,026,826
--------------- ---------------
Total increase/decrease in net assets (45,735,609) 41,781,165
Net assets at beginning of year 566,356,169 524,575,004
--------------- ---------------
Net assets at end of period
(includes undistributed net investment
loss of $1,192,611 and undistributed net
investment income of $383,173, respectively) $ 520,620,560 $ 566,356,169
=============== ===============
</Table>
See accompanying notes to financial statements.
18
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
PERIOD ENDED YEAR YEAR YEAR YEAR YEAR
6/30/05 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
-----------------------------------------------------------------------------------------------
Net asset value at
beginning of year $ 28.64 $ 27.78 $ 20.86 $ 22.50 $ 19.75 $ 15.90
--------------- ---------- ---------- ---------- ---------- ----------
Income from
investment
operations
Net Investment
loss (0.09)* (0.13)* (0.06)* (0.06)* (0.04)* (0.06)*
Net realized and
unrealized
gain/(loss) on
investments 0.79 4.68 8.54 (1.58) 2.79 3.91
--------------- ---------- ---------- ---------- ---------- ----------
Total from
investment
operations 0.70 4.55 8.48 (1.64) 2.75 3.85
--------------- ---------- ---------- ---------- ---------- ----------
Less distributions
from net realized
gains on
investments -- (3.69) (1.56) -- -- --
--------------- ---------- ---------- ---------- ---------- ----------
Net asset value at
end of period $ 29.34 $ 28.64 $ 27.78 $ 20.86 $ 22.50 $ 19.75
=============== ========== ========== ========== ========== ==========
Total Return 2.44%(a) 16.61% 40.71% (7.29%) 13.92% 24.21%
Ratios/Supplemental
Data
Ratio of expenses
to average net
assets 1.47%(b) 1.47% 1.48% 1.48% 1.49% 1.51%
Ratio of net
investment
loss to average
net assets (.61%)(b) (0.47%) (0.26%) (0.26%) (0.16%) (0.32%)
Portfolio turnover
rate 23%(a) 47% 52% 81% 93% 92%
Net assets, end
of period (in
thousands) $ 520,621 $ 566,356 $ 524,575 $ 378,839 $ 374,945 $ 286,951
=============== ========== ========== ========== ========== ==========
</Table>
* Based on monthly average shares outstanding
(a) Not Annualized
(b) Ratios have been determined on an annualized basis
19
<Page>
NOTES TO FINANCIAL STATEMENTS (unaudited)
Skyline Funds is an open-end, diversified investment management company the sole
portfolio of which is Special Equities Portfolio (the "Fund"). The Fund
commenced public offering of its shares on April 23, 1987. The Fund's investment
adviser is Skyline Asset Management, L.P. (the "Adviser"). The Fund seeks
maximum capital appreciation, primarily through investment in common stocks that
the Adviser considers to be undervalued.
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at value. Each equity security
traded on a securities exchange shall be valued at the last current sale price
as of the time of valuation on the exchange on which the security is principally
traded (the "principal exchange"), or lacking any current reported sale on the
principal exchange at the time of valuation, at the most recent bid quotation on
the principal exchange. Each over-the-counter security traded in the Nasdaq
Stock Market ("Nasdaq") shall be valued at the Nasdaq Official Closing Price
("NOCP"), as determined by Nasdaq, or lacking an NOCP, the last current reported
sale price as of the time of valuation on Nasdaq, or lacking any current
reported sale on Nasdaq at the time of valuation, at the most recent bid
quotation on Nasdaq. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by an
independent pricing service. Short-term instruments 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 or a
committee thereof.
- - 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 premiums and discounts.
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 substantially all of its taxable income to shareholders. Such
provisions were complied
20
<Page>
with and, therefore, no federal income taxes have been accrued in the
accompanying financial statements.
Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date. The timing and characterization of certain income and capital
gain distributions are determined annually in accordance with Federal income tax
regulations that may differ from accounting principles generally accepted in the
United States. As a result, net investment income or loss and net realized gain
or loss for a reporting period may differ from the amount distributed during
such period. In addition, the Fund may periodically record reclassifications
among certain capital accounts to reflect differences between financial
reporting and income tax purposes. These reclassifications have no impact on the
Fund's net asset value and will be updated at the Fund's fiscal year-end.
On December 14, 2004, a distribution of $3.69068 per share was declared. The
dividend was paid on December 16, 2004, to shareholders of record on December
15, 2004.
The tax character of distributions paid during 2004 was as follows:
<Table>
Distributions paid from:
Ordinary income $ 20,956,859
Long-term capital gain 44,139,815
-------------
$ 65,096,674
=============
</Table>
Cost of investments for federal income tax purposes was substantially the same
as book cost of $431,372,886 on June 30, 2005, net unrealized appreciation was
$100,792,469, consisting of gross unrealized appreciation of $107,453,346 and
gross unrealized depreciation of $6,660,877.
- - LINE OF CREDIT - The Fund has a $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 not utilized. Under the
terms of the credit agreement, interest on each loan would be fixed at the prime
rate less 150 basis points. During the first six months of 2005, a loan was
outstanding for one day during the period and generated interest of $194 which
was paid by the Adviser.
- - USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results may differ from
those estimates.
- - REDEMPTION FEE - The Fund will deduct a redemption fee (the "Redemption Fee")
of 2% from the proceeds of any redemption (including a redemption by exchange)
of shares if the redemption occurs within 30 days of the purchase of those
shares. For the purpose of determining whether a redemption is subject to the
Redemption Fee, redemptions of Fund shares are conducted in a first in/first out
(FIFO) basis such that
21
<Page>
shares with the longest holding period will be redeemed first and shares with
the shortest holding period will be redeemed last. The Redemption Fee is paid to
the Fund and is intended to offset transaction and other expenses caused by
short-term trading. The Redemption Fee does not apply to redemptions (including
redemptions by exchange) of shares of the Fund purchased by automatic
reinvestment of dividends or capital gains distributions. The Redemption Fee
will not apply to (1) redemptions of shares purchased through reinvestment of
dividend or capital gain distributions, and (2) redemptions under hardship
circumstances (as determined by the Adviser and the Fund in their discretion,
based on a case-by-case analysis). The Redemption Fee will apply only to the
redemption of shares purchased through an authorized agent if the authorized
agent has indicated that it will administer the Redemption Fee. For the six
months ended June 30, 2005, the Fund had $1,589 included in capital due to the
collection of redemption fees.
- - INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, the Trust may enter into
contracts that provide for general indemnification. The Trust's maximum
liability under those arrangements is unknown, as this would involve future
claims that may be made against the Trust. However, based on experience, the
Trust expects that risk of loss to be remote.
2
TRANSACTIONS WITH AFFILIATES
For the Adviser's management and advisory services and the assumption of most of
the Fund's ordinary operating expenses, the Fund incurs 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 incurred for the six months ended June 30, 2005 was $3,770,221.
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 six months ended June 30, 2005, the Fund incurred fees of $41,802 to its
independent trustees.
The Fund provides a deferred compensation plan for its trustees who are not
officers, limited partners or shareholders of limited partners of the Adviser.
Under the deferred compensation plan, trustees may elect to defer all or a
portion of their compensation. Amounts deferred are retained by the Fund, and to
the extent permitted by the Investment Company Act of 1940, as amended, may be
invested in the common shares of the Fund, as selected by the trustees.
Investments in such funds are reflected as in "Other Assets" on the Statement of
Assets and Liabilities at June 30, 2005. Appreciation/depreciation and
distributions received from these investments are
22
<Page>
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the Fund's net asset value.
3
FUND SHARE TRANSACTIONS
As of June 30, 2005, there were an unlimited number of shares of beneficial
interest, no par value, authorized. Transactions in the Fund's shares of
beneficial interest were as follows:
<Table>
<Caption>
SHARES DOLLAR AMOUNT
---------------------------------- ----------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
6/30/05 12/31/04 6/30/05 12/31/04
------------------------------------------------------------------------
Shares sold 1,083,137 2,867,618 $ 30,549,304 $ 82,639,085
Shares issued for
reinvestment of
dividends -- 2,268,238 -- 63,850,736
--------------- --------------- --------------- ---------------
Total shares issued 1,083,137 5,135,856 30,549,304 146,489,821
Less shares redeemed (3,112,764) (4,243,588) (87,711,056) (121,462,995)
--------------- --------------- --------------- ---------------
Net decrease/increase (2,029,627) 892,268 $ (57,161,752) $ 25,026,826
=============== =============== =============== ===============
</Table>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the six
months ended June 30, 2005, were as follows:
<Table>
Cost of purchases $ 115,949,317
Proceeds from sales $ 171,406,999
</Table>
23
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including a comprehensive
management fee and trustee fees. You may incur a 2% redemption fee in the event
shares are redeemed within 30 days. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period (01/01/05 - 06/30/05).
ACTUAL EXPENSES
The first line of the table that follows provides information about actual
account values (which includes the actual return of the Fund) and actual
expenses. You may use the information in this line, together with the amount you
invested, to estimate the expenses that you paid over the period. Simply divide
your account value by $1,000 (for example, an $8,600 account value divided by
$1,000 = 8.6), then multiply the result by the number in the first line under
the heading entitled "Expenses Paid During Period" to estimate the expenses you
paid on your account during this period. In addition to the expenses paid during
the period that are noted in the table, you may be assessed fees for outgoing
wire transfers, returned checks and stop payment orders at prevailing rates
charged by U.S. Bancorp Fund Services, LLC, the Fund's transfer agent. If you
request that a redemption be made by wire transfer, currently a $15.00 fee is
charged by the Fund's transfer agent. IRA accounts will be charged a $15.00
annual maintenance fee. These additional fees have the effect of reducing
investment returns.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table that follows provides information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds. Please note that the expenses shown
in the table are meant to highlight your ongoing costs only and do not reflect
any transactional costs, such as, redemption fees, or exchange fees. Therefore,
the second line of the table is useful in comparing ongoing costs only, and will
not help you determine the relative total costs of owning different mutual
funds. In addition, if these transactional costs were included, your costs would
have been higher.
24
<Page>
TABLE: EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD
01/01/05 06/30/05 01/01/05 - 06/30/05*
------------- ------------- --------------------
Actual $ 1,000.00 $ 1,024.40 $ 7.38
Hypothetical (5% return
before expenses) $ 1,000.00 $ 1,017.50 $ 7.35
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 1.47%
multiplied by the average account value over the period multiplied by
181/365 (to reflect the one-half year period).
APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT BY THE INDEPENDENT TRUSTEES
At a meeting (the "Meeting") of the Board of Trustees (the "Board") held on
May 17, 2005, the Board, including all the trustees who are not "interested
persons" of the Trust, as that term is defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended (hereafter, the "Independent
Trustees"), met to consider the continuation of the investment advisory
agreement (the "Agreement") between Skyline Asset Management, L.P.
("Adviser") and Skyline Funds (the "Fund").
Prior to the Meeting, the Adviser had provided the Board with a number of
written materials in response to a written request from counsel to the
Independent Trustees, including information relating to: a) data comparing
the Fund's investment performance, expenses, and fees to comparable, as well
as a broad universe of, investment companies, as independently chosen by
Lipper, Inc.; b) the background and experience of the Adviser's management
and investment personnel; c) the financial condition and stability of the
Adviser, including a profitability analysis; d) the terms of the Agreement
and fee arrangement with the Fund; and e) administrative, compliance and
other services provided by the Adviser. The Trustees also received and
reviewed a memorandum from counsel to the Independent Trustees regarding
their responsibilities in evaluating the Agreement. During the Meeting, the
Independent Trustees engaged in in-person discussions with the executive
committee along with other employees of the Adviser. The Independent
Trustees also met outside the presence of the Adviser.
At the meeting, the Trustees determined that the Agreement was fair and
reasonable in light of the nature and quality of the services provided by the
Adviser, the fees charged for those services and other matters that the
Trustees considered relevant in the exercise of their business judgment. As
a result, the Trustees, including all of the Independent Trustees,
unanimously approved the continuation of the Agreement, subject to earlier
termination as provided in the Agreement.
25
<Page>
In considering the continuation of the Agreement, the Trustees reviewed and
analyzed various factors that they determined were relevant, including the
factors described below, none of which by itself was considered
determinative. However, the specific factors and conclusions that formed the
basis for the Trustees' determination to approve the continuation of the
Agreement are discussed separately below.
NATURE, QUALITY AND EXTENT OF SERVICES. The Trustees reviewed the nature,
extent and quality of the services provided by the Adviser under the
Agreement, taking into account the investment objective and strategy of the
Fund and the knowledge the Trustees gained from their quarterly meetings with
the Adviser, and the materials provided in connection with those meetings. In
addition, the Trustees reviewed the Adviser's resources and key personnel,
especially those who provide investment management services to the Fund. The
Trustees particularly noted the large and highly experienced professional
staff of the Adviser involved in providing investment management services to
the Fund. The Trustees also considered other services provided to the Fund by
the Adviser, such as managing the quality of execution of portfolio
transactions and the selection of broker-dealers for those transactions,
monitoring adherence to the Fund's investment restrictions, producing
reports, providing support services for the Board and Board committees,
communicating with shareholders and overseeing the activities of other
service providers, including monitoring compliance with various Fund policies
and procedures and with applicable securities laws and regulations.
The Trustees concluded that the nature and extent of the services provided by
the Adviser were appropriate and consistent with the terms of the Agreement,
that the quality of those services had been consistent with quality norms in
the industry and that the Fund was likely to benefit from the continued
provision of those services. They also concluded that the Adviser had highly
qualified and capable personnel, with the appropriate education and
experience, to serve the Fund effectively.
PERFORMANCE OF THE FUND. The Trustees considered information on the
short-term and long-term performance of the Fund, including comparative
information. The Trustees noted that when comparing the Fund's performance
against Lipper's Small Cap Value Funds universe, the Fund was in the 1st
quintile for the since inception reporting period, the third quintile for the
five year performance reporting period and fourth quintile for the one, three
and ten year performance reporting periods. The Trustees further noted that
when comparing the Fund against Lipper's All Small Cap Funds universe, the
Fund was in the 1st quintile for the since inception and five year
performance reporting periods, and was in the second quintile for one, three
and ten year performance reporting periods. The Board further examined the
Fund's since inception performance, as well as its one, three, five and ten
year performance against the Lipper Small Cap Value Index, the Russell 2000
Index and the Russell 3000 Index
26
<Page>
(noting that the Fund performed better than each of the Russell 2000 Index
and Russell 3000 Index for each time period examined). The Trustees
concluded that, although past performance is not necessarily indicative of
future results, the Fund's long-term performance record had been outstanding
and beneficial to the Fund's shareholders.
COSTS OF SERVICES AND PROFITS REALIZED BY THE ADVISER. The Trustees examined
information on fees and expenses of the Fund in comparison to information for
other comparable funds. The Trustees considered the all-inclusive fee that
the Fund pays to the Adviser under which the Adviser is responsible for
payment of all of the Fund's expenses, excluding Independent Trustee fees.
The Trustees concluded that the fees payable by the Fund were reasonable in
relation to the nature and quality of the services provided by the Adviser
taking into account the specific fees charged by other advisers for managing
comparable mutual funds with similar strategies. The Trustees further
considered that the Fund's total expenses were somewhat higher than the
median for comparable no-load mutual funds. However, the Trustees concluded
that the Fund's overall expense ratio, taking into account quality of
services provided by the Adviser and the investment performance of the Fund,
was reasonable.
The Trustees reviewed information on the profitability of the Adviser under
the Agreement, noting specifically that the Adviser had provided an extensive
profitability analysis to the Trustees prior to the meeting. Based on the
information available and taking into account the difficulty of making
comparisons in this area due to the lack of publicly available information,
the Trustees concluded that the profitability of the Adviser in relation to
the services rendered under the Agreement was reasonable.
Finally, the Trustees considered the financial condition of the Adviser and
its general partner, which they found to be sound.
ECONOMIES OF SCALE. The Trustees received and discussed information
concerning whether economies of scale are being realized by the Fund and
whether fee levels reflect those economies of scale for the benefit of the
Fund's shareholders. The Board considered the current and anticipated asset
levels of the Fund and the potential for growth in the Fund's assets, and
noted that as the Fund's assets increase shareholders will achieve economies
of scale. The Trustees concluded that the current asset size of the Fund did
not warrant evaluating the fee schedule for the Fund at this time.
OTHER BENEFITS TO THE ADVISER. The Trustees also considered benefits that
accrue to the Adviser from its relationship with the Fund. The Board noted
that certain services are provided by an affiliate of the Adviser, including
administrative, distribution and compliance services. The Board also
considered the recent reduction in the use of soft dollars for payment of
services utilized by the Adviser. After full consideration of these and other
factors, the Board concluded that neither the Adviser nor its affiliate
27
<Page>
received any additional direct benefits that would warrant consideration and
preclude the Board from approving the continuation of the Agreement.
After full consideration of the above factors, as well as other factors that
were instructive in analyzing the management agreement, the Trustees,
including all of the non-interested Trustees, concluded that the continuation
of the Agreement was in the best interest of the Fund and its shareholders.
PROXY POLICY & PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by calling 800.828.2759, and on the Securities and Exchange
Commission's website at www.sec.gov. The Fund's proxy voting record for the
twelve month period ended June 30, 2005, is also available without charge, upon
request, by calling 800.828.2759, by visiting the Fund's website at
www.skylinefunds.com and by visiting the SEC website at www.sec.gov.
FORM N-Q
The Fund files a complete list of its portfolio holdings with the SEC for the
first and third quarters each fiscal year on Form N-Q. The Form N-Q is available
without charge, upon request, by calling 800.828.2759 or by visiting the SEC
website. You may also review, for a fee, a copy of the form at the SEC's Public
Reference Room in Washington, D.C. (800) SEC-0330.
28
<Page>
For 24-hour account information CALL: 1.800.828.2SKY
(1.800.828.2759)
To speak with a Skyline Funds Representative during
normal business hours CALL: 1.800.828.2SKY and press 0 when prompted.
To learn more about our expertise in small cap value, please visit our website
at www.skylinefunds.com
[SKYLINE FUNDS LOGO]
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
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ITEM 2. CODE OF ETHICS.
Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable for semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable to open-end investment companies.
ITEM 6. SCHEDULE OF INVESTMENTS
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to open-end investment companies.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, the "Disclosure
Controls") as of a date within 90 days prior to the filing date (the "Filing
Date") of this Form N-CSR (the "Report"), the Disclosure Controls are
effectively designed to ensure that information required to be disclosed by the
Registrant in the Report is recorded, processed, summarized and reported by the
Filing Date, including ensuring that information required to be disclosed in the
Report is accumulated and communicated to the Registrant's management, including
the Registrant's principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) There were no changes in the Registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940)
that occurred during the Registrant's second fiscal quarter of the period
covered by the report that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(A) Certifications of William M. Dutton, President and Trustee of Skyline
Funds and Benjamin J. Kim, Vice President and Treasurer of Skyline
Funds pursuant to Rule 30a-2(a) under the Investment Company Act of
1940 (17 CFR 270.30a-2(a)), attached hereto as Exhibits (a)(1) and
(a)(2)
(B) Certifications of William M. Dutton, President and Trustee of Skyline
Funds and Benjamin J. Kim, Vice President and Treasurer of Skyline
Funds pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
attached hereto as Exhibit (2)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Skyline Funds
By: /s/William M. Dutton
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William M. Dutton
President and Trustee
(Principal Executive Officer)
Date: August 24, 2005
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/William M. Dutton
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William M. Dutton
President and Trustee
(Principal Executive Officer)
Date: August 24, 2005
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By: /s/Benjamin J. Kim
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Benjamin J. Kim
Vice President and Treasurer
(Principal Financial Officer)
Date: August 24, 2005
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