<PAGE>
[GRAPHIC]
SEMI-ANNUAL REPORT - 2ND QUARTER 1998
SKYLINE SPECIAL EQUITIES PORTFOLIO
- ----------------------------------
JUNE 30, 1998
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
[LOGO]
SKYLINE FUNDS
<PAGE>
LETTER FROM WILLIAM M. DUTTON, PORTFOLIO MANAGER:(1)
- -------------------------------------------------------------------------------
August 3, 1998
Dear Shareholder:
The second quarter was a disappointing one for the Fund, as it showed a decline
of 5.44% for the period. For the first six months of 1998, the Fund showed a
gain of 5.22% due to strong first quarter results. The Fund slightly
underperformed the Russell 2000 Index in the second quarter and slightly
outperformed the Index for the six-month period.
MARKET REVIEW
Perceptions about the economy changed dramatically during the second quarter,
leading to some unusual results in the stock market. Following very strong
economic growth in the first quarter, signs of a slowdown appeared by the end of
the second quarter. Most importantly, many companies announced that earnings
would not be as strong as expected. Investors reacted to the news with a "flight
to quality" mentality, buying large blue chip stocks and selling small cap
stocks. This response created a huge disparity in performance between large and
small stocks, with the S&P 500 showing a 3.32% gain for the second quarter
compared to a loss of 4.66% for the Russell 2000 Index. This type of disparity
sometimes occurs when investors believe that the economy may run into trouble or
that the stock market may be peaking.
Within the small cap market, sector performance was mixed, with consumer and
interest rate sensitive stocks doing better than economically sensitive stocks.
The consumer area remains the strongest part of the economy, with consumer
confidence high and consumer spending strong. Interest rate sensitive stocks,
such as financials and utilities, performed relatively well for the quarter, as
interest rates declined during the second quarter. Underperforming these groups
were economically sensitive stocks, which were hurt by investors' fears of a
slowing economy.
PORTFOLIO REVIEW
The Fund showed a loss of 5.44% in the second quarter compared to a loss of
4.66% for the Russell 2000 Index. For the six months, the Fund showed a gain of
5.22% compared to a gain of 4.93% for the Russell 2000 Index. For both the
quarter and six months, sector performance was mixed in the Fund, with consumer,
health care, and financial services stocks performing relatively well, while
technology, energy, and economically sensitive stocks did poorly. Individual
stock selection was not as strong as usual, as the Fund had too many stocks
showing significant losses. While a few of these issues had major fundamental
business problems, many were knocked down unfairly, in our opinion, by a stock
market that was hypersensitive to minor short term earnings problems. We believe
that most of these issues will rebound over the coming months as investors see
the companies perform well.
SEMI-ANNUAL REPORT - JUNE 30, 1998 1
<PAGE>
During this turbulent period, we have tried to position the Fund so that it will
perform well when small cap stocks are back in vogue. We have sold stocks that
have fundamental problems and replaced them with stocks that have better
outlooks. We believe the Fund is invested in stocks that have good earnings
prospects and attractive valuations. In our opinion, the holdings have excellent
risk/reward profiles, with significant appreciation potential.
OUTLOOK
With the recent decline in small cap stocks, we believe they are positioned to
show strong relative performance because they have historically low relative
valuations and better opportunity for superior earnings growth. The Russell 2000
Index is trading at its all-time low level relative to the S&P 500 Index on
several valuation measures. At the same time, we believe there is an opportunity
for small cap companies to show superior earnings growth relative to large
companies, as small companies go through the restructuring process that many
large companies have already been through. While we recognize that overall stock
market valuations are high, we feel that small cap stocks will deliver superior
performance over the next several years.
/s/ William M. Dutton
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL
EQUITIES RUSSELL 2000 S&P 500
<S> <C> <C> <C>
P/E RATIO (MEDIAN) 17.0 22.1 22.9
PRICE/BOOK 2.12 2.68 4.49
PRICE/SALES 0.73 1.43 1.92
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 13.9% 18.8% 10.1%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $450 million $740 million $50 billion
PORTFOLIO VALUE $534 million $940 billion $8,934 billion
NUMBER OF HOLDINGS 83 2,000 500
- --------------------------------------------------------------------------------
TICKER SYMBOL: SKSEX
CUSIP #: 830833208
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</TABLE>
2 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
Top Ten Holdings(2) % OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
FINGERHUT COMPANIES, INC.
Catalog retailer 2.8%
DELPHI FINANCIAL GROUP, INC.
Accident & health insurance 2.6%
WORLD COLOR PRESS, INC.
Commercial printer 2.1%
IHOP CORP.
Restaurant operator 2.0%
LANDSTAR SYSTEM, INC.
Truckload carrier 2.0%
NEW ENGLAND BUSINESS SERVICE, INC.
Business forms firm 1.9%
INTERPOOL, INC.
Container leasing firm 1.8%
CITATION CORP.
Castings manufacturer 1.8%
FURON COMPANY
Polymer-based products 1.8%
DISCOUNT AUTO PARTS, INC.
Auto parts stores 1.7%
TOP TEN HOLDINGS 20.5%
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 3
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2Q YTD
1998 1998 1yr.
<S> <C> <C> <C>
SPECIAL EQUITIES -5.44 5.22 16.62
RUSSELL 2000 -4.66 4.93 16.50
S&P 500 3.32 17.75 30.30
</TABLE>
<TABLE>
<CAPTION>
CALENDAR YEARS
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
SPECIAL EQUITIES 35.4 30.4 13.8 -1.2 22.9
RUSSELL 2000 22.4 16.5 28.4 -1.8 18.9
S&P 500 33.4 23.3 37.5 1.3 10.0
</TABLE>
SECTOR WEIGHTINGS (as of June 30, 1998)
- --------------------------------------------------------------------------------
[CHART]
<TABLE>
<S> <C>
Autos & Transportation 11.1%
Consumer Discretionary 34.6%
Consumer Staples 1.4%
Energy 4.1%
Financial Services 12.9%
Health Care 3.9%
Materials & Processing 13.4%
Producer Durables 8.7%
Technology 6.4%
Cash 3.5%
</TABLE>
4 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
3 yrs. 5 yrs. 10 yrs. Inception(3)
<S> <C> <C> <C>
25.78 18.78 19.78 18.28
18.85 16.05 13.57 11.64
30.34 23.13 18.56 16.34
</TABLE>
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987(3)
<S> <C> <C> <C> <C> <C>
42.5 47.4 -9.3 24.0 29.7 -16.9
18.4 46.1 -19.5 16.2 24.9 -24.3
7.7 30.6 -3.2 31.4 16.5 -12.0
</TABLE>
SECTOR PERFORMANCE (as of June 30, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2Q 1998 YTD 1998
------------------ -------------------
SPECIAL RUSSELL SPECIAL RUSSELL
EQUITIES 2000 EQUITIES 2000
<S> <C> <C> <C> <C>
HEALTH CARE 6.6% -10.0% 27.7% -2.2%
----------------------------------------------------
CONSUMER DISCRETIONARY 5.7 -1.2 25.4 13.6
----------------------------------------------------
FINANCIAL SERVICES 3.0 -2.4 16.3 2.6
----------------------------------------------------
OTHER 0.0 -11.1 0.0 -2.3
----------------------------------------------------
UTILITIES 0.0 -1.3 0.0 10.7
----------------------------------------------------
CONSUMER STAPLES -7.5 -6.1 23.3 1.7
----------------------------------------------------
AUTOS & TRANSPORTAION -10.1 -0.6 2.2 12.6
----------------------------------------------------
PRODUCER DURABLES -12.9 -8.5 -6.4 2.5
----------------------------------------------------
MATERIALS & PROCESSING -16.8 -6.0 -6.1 5.3
----------------------------------------------------
ENERGY -18.8 -13.3 -21.6 -13.8
----------------------------------------------------
TECHNOLOGY -25.4 -6.2 -29.5 7.0
----------------------------------------------------
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 5
<PAGE>
STOCK HIGHLIGHTS(2)
- --------------------------------------------------------------------------------
FABRI-CENTERS OF AMERICA, INC. (FCAA)
Fabri-Centers of America (to be renamed Jo-Ann Stores, Inc. in August) is the
nation's largest retailer serving the fabric and craft industry under a variety
of names, most prominently Jo-Ann Fabrics and Crafts. FCAA has enjoyed strong
earnings growth in recent years as an industry consolidator (successfully
acquiring and integrating competitors) and by refining and improving operations
internally. On April 21, FCAA completed the acquisition of a major competitor,
House of Fabrics. Due to House of Fabrics' weak financial condition, FCAA was
able to acquire the company at a very attractive price. As a result, once the
acquisition has been fully integrated, earnings should move sharply higher.
Despite the bright outlook, FCAA trades at a very modest valuation.
NEW ENGLAND BUSINESS SERVICE, INC. (NEB)
New England Business Service is a direct marketer of imprinted products,
primarily custom business forms, to small (less than 20 employees) businesses.
NEB's growth is being driven by its ability to leverage, through acquisitions
and new product development, its strong printing and fulfillment capabilities,
along with its extensive mailing list of small business customers. NEB's recent
turnaround has been led by Chairman and CEO Robert Murray, previously head of
The Gillette Company's North Atlantic Group. At 17x current earnings, NEB is an
inexpensive stock, especially when its very conservative accounting practices
(which tend to understate earnings) are taken into account.
NOTES TO PERFORMANCE
(1) The performance for the one, three, five, and ten years ended June 30,
1998, and for the period April 23, 1987 (inception) through June 30, 1998,
is an average annual total return calculation which is described in the
Fund's prospectus. Of course, past performance is no guarantee of future
results. The principal value and return on your investment will fluctuate
and on redemption may be worth more or less than your original cost.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. The S&P 500 Index, a widely quoted
stock market index, includes 500 of the largest companies publicly traded
in America. All figures take into account reinvested dividends. All
indexes and Fund characteristics are compiled by Frank Russell Company.
Special Equities Portfolio closed to new investors on January 30, 1997.
(2) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
(3) Return is calculated from the Fund's inception on April 23, 1987.
This report is not authorized for distribution unless accompanied or
preceded by a current prospectus.
There are risks of investing in a fund of this type which invests in
stocks of small companies, which tend to be more volatile and less liquid
than stocks of large companies.
Distributor: Funds Distributor Inc.
6 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY.
SEMI-ANNUAL REPORT -- JUNE 30, 1998 7
<PAGE>
PORTFOLIO HOLDINGS as of June 30, 1998 (unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
---------------------------- --------- --------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 11.1%
AUTO RELATED - 4.0%
Aftermarket Technology Corp.(a) Auto drive train products 292,900 $ 5,491,875
Delco Remy International, Inc.(a) Starters & alternators 387,400 4,987,775
Excel Industries, Inc. OEM auto parts supplier 164,200 2,350,112
Intermet Corp. Metal castings 462,000 8,373,750
--------------
21,203,512
OTHER TRANSPORTATION - 4.4%
Interpool, Inc. Container leasing firm 675,000 9,745,313
Kitty Hawk, Inc.(a) Air freight services 335,100 5,696,700
Monaco Coach Corp. RV producer 240,900 7,046,325
Trailer Bridge, Inc.(a) Marine transportation 316,800 1,267,200
--------------
23,755,538
TRUCKING - 2.7%
Landstar System, Inc.(a) Truckload carrier 300,000 10,481,250
U.S. Xpress Enterprises, Inc.(a) Specialty truckload carrier 239,500 4,011,625
--------------
14,492,875
--------------
TOTAL AUTOS & TRANSPORTATION 59,451,925
CONSUMER DISCRETIONARY - 34.6%
APPAREL/TEXTILES - 2.1%
Gerber Childrenswear, Inc.(a) Markets infant/toddler appar. 254,400 3,927,300
Kellwood Co. Apparel manufacturer 202,900 7,253,675
--------------
11,180,975
COMMERCIAL SERVICES - 4.8%
Borg-Warner Security Corp.(a) Security services 387,400 8,764,925
New England Business
Service, Inc. Business forms firm 307,400 9,913,650
Standard Register Co. (The) Business forms 189,900 6,717,712
--------------
25,396,287
CONSUMER PRODUCTS/SERVICES - 5.8%
Gibson Greetings, Inc.(a) Greeting cards 258,400 6,460,000
Harman Int'l Industries, Inc. Audio equipment producer 132,900 5,116,650
Libbey Inc. Glass tableware producer 208,900 8,003,481
Maxwell Shoe Co. Inc.(a) Footwear company 280,200 5,568,975
Oneida Ltd. Tableware/flatware 193,300 5,919,812
--------------
31,068,918
PRINTING/PUBLISHING - 3.7%
Banta Corp.(a) Printing company 171,300 5,288,888
Cadmus Communications
Corp.(a) Commercial printer 144,000 3,492,000
World Color Press, Inc.(a) Commercial printer 315,300 11,035,500
--------------
19,816,388
8 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- --------------
<S> <C> <C> <C>
RESTAURANTS - 4.0%
IHOP Corp.(a) Restaurant operator 261,300 $ 10,811,288
O'Charley's Inc. Casual dining 353,850 5,307,750
Ryan's Family Steak
Houses, Inc.(a) Casual dining 528,600 5,418,150
--------------
21,537,188
RETAIL - 14.2%
Charming Shoppes, Inc.(a) Women's apparel 1,103,500 5,241,625
Discount Auto Parts, Inc.(a) Auto parts stores 355,600 9,245,600
Fabri-Centers of America, Inc.(a) Fabric/craft stores 232,500 6,364,687
Fingerhut Companies, Inc. Catalog retailer 452,100 14,919,300
Finlay Enterprises, Inc.(a) Leased jewelry departments 230,100 5,551,162
Heilig-Meyers Co.(a) Furniture store operator 522,300 6,430,819
MarineMax, Inc.(a) Recreational boats 308,400 3,816,450
Musicland Stores Corp.(a) Entertainment products 561,900 7,866,600
Tractor Supply Co.(a) Farm-related products 334,400 8,318,200
Zale Corp.(a) Jewelry retailer 253,200 8,054,925
--------------
75,809,368
--------------
TOTAL CONSUMER DISCRETIONARY 184,809,124
CONSUMER STAPLES - 1.4%
CONSUMER STAPLES - 1.4%
International Multifoods Corp. Foodservice distribution 275,600 7,579,000
ENERGY - 4.1%
EXPLORATION & PRODUCTION - 2.3%
Comstock Resources, Inc.(a) Oil & gas producer 540,200 4,017,737
Miller Exploration Co.(a) Oil & gas producer 473,400 3,668,850
Swift Energy Co.(a) Oil & gas producer 298,190 4,752,403
--------------
12,438,990
OTHER ENERGY - 1.8%
MarkWest Hydrocarbon, Inc.(a) Natural gas processing 283,300 4,320,325
Willbros Group Inc.(a) Engineering/construction 342,300 5,348,438
--------------
9,668,763
--------------
TOTAL ENERGY 22,107,753
FINANCIAL SERVICES - 12.9%
INSURANCE - 12.9%
American Heritage Life
Investment Life insurance 351,700 8,133,062
Blanch (E.W.) Holdings, Inc. Reinsurance brokerage 208,200 7,651,350
Chartwell Re Corporation P & C reinsurance 167,300 4,924,894
Delphi Financial Group, Inc. Accident & health insurance 245,458 13,822,354
SEMI-ANNUAL REPORT - JUNE 30, 1998 9
<PAGE>
<CAPTION>
PORTFOLIO HOLDINGS as of June 30, 1998 (continued)
- --------------------------------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- --------------
<S> <C> <C> <C>
Financial Security Assurance
Holdings Municipal bond insurance 149,300 $ 8,771,375
Fremont General Corp. Workers' comp. insurance 148,800 8,063,100
Highlands Insurance
Group, Inc.(a) P&C insurance 282,300 5,222,550
Horace Mann Educators Corp. P&C insurance 160,600 5,540,700
SCPIE Holdings Inc. Medical malpractice ins. 193,700 6,561,587
--------------
TOTAL FINANCIAL SERVICES 68,690,972
HEALTH CARE - 3.9%
HEALTH CARE SERVICES - 1.7%
Trigon Healthcare, Inc.(a) Health maintenance organ. 246,600 8,923,838
MEDICAL EQUIPMENT/PRODUCTS - 2.2%
Acuson Corp.(a) Ultrasound imaging sys. 332,500 6,047,344
Marquette Medical
Systems, Inc.(a) Monitoring equipment 229,400 5,885,544
--------------
11,932,888
--------------
TOTAL HEALTH CARE 20,856,726
MATERIALS & PROCESSING - 13.4%
BUILDING/CONSTRUCTION PRODUCTS - 4.4%
Ameron International Corp.(a) Concrete pipe/coatings 104,400 6,035,625
Chicago Bridge & Iron Co. Maker of steel tanks 460,100 7,131,550
Dayton Superior Corp.(a) Concrete accessories 286,900 5,164,200
Nortek, Inc.(a) Building products 170,100 5,230,575
--------------
23,561,950
INDUSTRIAL PRODUCTS - 2.6%
Furon Company Polymer-based products 516,900 9,368,812
Lydall, Inc.(a) Specialty filtration products 307,000 4,470,688
--------------
13,839,500
METAL FABRICATIONS - 1.8%
Citation Corp.(a) Castings manufacturer 482,500 9,650,000
PACKAGING/PAPER - 2.8%
Albany International Corp. Paper machine clothing 247,632 5,927,691
BWAY Corp.(a) Metal cans/containers 268,000 5,762,000
FiberMark, Inc.(a) Fiber-based materials 195,100 3,121,600
--------------
14,811,291
SPECIALTY CHEMICALS - 0.8%
Fuller Company (H.B.)(a) Adhesives and coatings 72,900 4,041,394
10 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- --------------
<S> <C> <C> <C>
STEEL/IRON - 1.0%
Birmingham Steel Corp. Steel mini-mill 453,400 $ 5,610,825
--------------
TOTAL MATERIALS & PROCESSING 71,514,960
PRODUCER DURABLES - 8.7%
ELECTRICAL EQUIPMENT/PRODUCTS - 1.5%
MagneTek, Inc.(a) Integrated electrical prods. 497,900 7,841,925
MACHINERY - 3.5%
Applied Industrial
Technologies Industrial prods. distributor 300,150 6,171,834
Brown & Sharpe Mfg. Co.(a) Metrology instruments 293,000 3,516,000
DT Industries, Inc. Packaging equipment 237,100 5,749,675
SunSource Inc. Conglomerate 163,200 3,549,600
--------------
18,987,109
OTHER PRODUCER DURABLES - 3.7%
EG&G, Inc. Conglomerate 240,900 7,227,000
LSI Industries Inc. Lighting/graphics products 242,000 4,840,000
Tokheim Corp.(a) Gas station pumps/eqpt 362,800 7,437,400
--------------
19,504,400
--------------
TOTAL PRODUCER DURABLES 46,333,434
TECHNOLOGY - 6.4%
ELECTRONIC COMPONENTS - 2.7%
Artesyn Technologies, Inc.(a) Power supplies 329,400 5,270,400
Dallas Semiconductor Corp. Electronic components 153,300 4,752,300
Hadco Corp.(a) Printed circuit boards 82,000 1,911,625
Microsemi Corp.(a) Semiconductor producer 258,100 2,387,425
--------------
14,321,750
OTHER TECHNOLOGY - 3.7%
BancTec Inc.(a) Financial software/eqpt. 267,700 6,190,562
GENICOM Corp.(a) Computer support services 265,300 1,227,013
Imation Corp.(a) Data storage products 342,300 5,669,344
PSC Inc.(a) Bar coding equipment 326,700 2,960,719
Richardson Electronics, Ltd.(a) Distributes electronic comps. 284,200 3,836,700
--------------
19,884,338
--------------
TOTAL TECHNOLOGY 34,206,088
--------------
TOTAL COMMON STOCKS - 96.5%
(Cost $450,061,199) 515,549,982
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 11
<PAGE>
PORTFOLIO HOLDINGS as of June 30, 1998 (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
--------------
<S> <C>
MONEY MARKET INSTRUMENTS(b)
Yield 5.25 to 5.27%
due August 1998 to February 1999
American Family Financial Services $ 670,932
General Mills, Inc. 524,080
Johnson Controls, Inc. 5,782,278
Pitney Bowes Credit Corp. 5,423,000
Sara Lee Corp. 10,000,000
--------------
TOTAL MONEY MARKET INSTRUMENTS - 4.2%
(Cost: $22,400,290) 22,400,290
--------------
TOTAL INVESTMENTS - 100.7%
(Cost $472,461,489) 537,950,272
OTHER LIABILITIES LESS ASSETS - (0.7%) (3,600,031)
--------------
NET ASSETS - 100.0% $ 534,350,241
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Variable rate demand notes. Interest rates are reset every seven days.
Rates disclosed represent rates in effect on June 30, 1998.
Based on cost of investments for federal income tax purposes of $472,461,489 on
June 30, 1998, net unrealized appreciation was $65,488,783, consisting of gross
unrealized appreciation of $92,378,980 and gross unrealized depreciation of
$26,890,197.
See accompanying notes to financial statements.
12 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of June 30, 1998 (unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments, at value (Cost: $472,461,489) $ 537,950,272
Receivable for:
Securities sold $ 2,617,809
Dividends and interest 225,118
Shares sold 323,417 3,166,344
----------- -------------
Total assets 541,116,616
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 4,396,411
Shares redeemed 1,729,780
Comprehensive management fee 640,184 6,766,375
----------- -------------
Net assets applicable to shares outstanding $ 534,350,241
-------------
-------------
Shares outstanding--no par value
(unlimited number of shares authorized) 23,446,890
-------------
-------------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 22.79
-------------
-------------
ANALYSIS OF NET ASSETS
Paid-in capital $ 432,914,901
Undistributed net realized gain on
sales of investments 37,125,970
Unrealized appreciation of investments 65,488,783
Accumulated net investment loss (1,179,413)
-------------
Net assets applicable to shares outstanding $ 534,350,241
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1998 13
<PAGE>
STATEMENT OF OPERATIONS Six Months Ended June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 1,372,829
Interest 1,262,916
-------------
Total investment income 2,635,745
Expenses:
Comprehensive management fee 3,804,139
Fees to unaffiliated trustees 11,019
-------------
Total expenses 3,815,158
-------------
Net investment loss (1,179,413)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 34,497,516
Net change in unrealized appreciation (8,518,944)
-------------
Net realized and unrealized gain on investments 25,978,572
-------------
Net increase in net assets resulting from operations $ 24,799,159
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
14 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended 6/30/98 Year Ended
(Unaudited) 12/31/97
--------------- ---------------
<S> <C> <C>
From operations:
Net investment loss $ (1,179,413) $ (1,451,263)
Net realized gain on sales of
investments 34,497,516 54,539,741
Net change in unrealized appreciation (8,518,944) 45,751,321
--------------- ---------------
Net increase in net assets resulting
from operations 24,799,159 98,839,799
Distributions to shareholders from
net realized gains -- (54,133,704)
From share transactions:
Proceeds from shares sold 83,386,039 210,895,971
Reinvestment of capital gain
distributions -- 52,981,301
Payments for shares redeemed (40,904,647) (60,994,053)
--------------- ---------------
Net increase in net assets resulting
from share transactions 42,481,392 202,883,219
--------------- ---------------
Total increase in net assets 67,280,551 247,589,314
Net assets at beginning of period 467,069,690 219,480,376
--------------- ---------------
Net assets at end of period $ 534,350,241 $ 467,069,690
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1998 15
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Year Year Year
Ended 6/30/98 Ended Ended Ended Ended
(unaudited) 12/31/97 12/31/96 12/31/95 12/31/94
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 21.66 $ 18.16 $ 16.79 $ 15.64 $ 17.83
---------- --------- --------- -------- ---------
Income from Investment
Operations
Net investment loss (0.04) (0.07) (0.04) (0.06) (0.08)
Net realized and unrealized
gain (loss) on investments 1.17 6.46 5.02 2.21 (0.18)
---------- --------- --------- -------- ---------
Total from investment
operations 1.13 6.39 4.98 2.15 (0.26)
---------- --------- --------- -------- ---------
Less distributions from net
realized gains on investments -- (2.89) (3.61) (1.00) (1.93)
---------- --------- --------- -------- ---------
Net asset value at end of period $ 22.79 $ 21.66 $ 18.16 $ 16.79 $ 15.64
---------- --------- --------- -------- ---------
---------- --------- --------- -------- ---------
Total Return 5.22%(a) 35.43% 30.37% 13.83% (1.15%)
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.46%(b) 1.48% 1.51% 1.51% 1.49%
Ratio of net investment
loss to average net
assets (0.45%)(b) (0.41%) (0.32%) (0.35%) (0.49%)
Portfolio turnover rate 60%(b) 62% 130% 71% 82%
Net assets, end of period
(in thousands) $534,350 $467,070 $219,480 $174,899 $202,771
---------- --------- --------- -------- ---------
---------- --------- --------- -------- ---------
</TABLE>
Average commission rate paid on stock transactions for the six months ended June
30, 1998 was $0.0524 per share. Average commission rates paid on stock
transactions for the years ended December 31, 1997 and December 31, 1996 were
$0.0601 and $0.0636 per share, respectively.
Effective August 31, 1995, the Fund's Investment Adviser changed from Mesirow
Asset Management, Inc., to Skyline Asset Management, L.P.
Note: Total return does not reflect the effect of any sales charges which may
have been previously charged.
(a) For the six months ended June 30, 1998.
(b) Ratios have been determined on an annualized basis.
See accompanying notes to financial statements.
16 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Skyline Funds is an open-ended, diversified investment management company which
consists of Special Equities Portfolio, Small Cap Value Plus, 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 (formerly
Special Equities II) on February 9, 1993, and Small Cap Contrarian on December
15, 1997. The following notes relate solely to the accompanying financial
statements of Special Equities Portfolio ("Fund"). Skyline Special Equities
Portfolio closed to new investors on January 30, 1997.
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
- - SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of premium and discount on money
market instruments. Realized gains and losses from security transactions are
reported on an identified cost basis.
- - FUND SHARE VALUATION - Fund shares are sold and redeemed on a continuous
basis at net asset value. Net asset value per share is determined as of the
close of regular session trading on the New York Stock Exchange (normally 3:00
p.m. Central time), each day the Exchange is open for trading. The net asset
value per share is determined by dividing the value of all securities and other
assets, less liabilities, by the number of shares of the Fund outstanding.
- - FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund's policy to comply with the special provisions of the Internal Revenue
Code available to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income. Such provisions were complied
with and, therefore, no federal income taxes have been accrued.
- - EXPENSES - Expenses arising in connection with a Fund are allocated to that
Fund. Other Skyline Funds' expenses, such as trustees' fees, are allocated among
the three Skyline Funds.
SEMI-ANNUAL REPORT - JUNE 30, 1998 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
2
TRANSACTIONS WITH AFFILIATES
The Fund's Investment Adviser is Skyline Asset Management, L.P. ("Adviser"). For
the Adviser's management and advisory services and the assumption of most of the
Fund's ordinary operating expenses, the Fund pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total comprehensive management
fee charged for the six months ended June 30, 1998 was $3,804,139.
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, 1998, the Fund paid fees of $11,019 to its
unaffiliated trustees.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
Six Months Ended Year ended
6/30/98 12/31/97
--------------------------------
<S> <C> <C>
Shares sold 3,665,890 9,851,723
Shares issued
for reinvestment of dividends -- 2,483,873
------------- -----------
3,665,890 12,335,596
Less shares redeemed (1,786,101) (2,855,781)
------------- -----------
Net increase in shares outstanding 1,879,789 9,479,815
------------- -----------
------------- -----------
</TABLE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the six
months ended June 30, 1998, are as follows:
<TABLE>
<S> <C>
Cost of purchases $ 195,489,548
Proceeds from sales 147,573,332
</TABLE>
18 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
REPORT FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
This report, including the unaudited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
SEMI-ANNUAL REPORT - JUNE 30, 1998 19
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY.
20 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
FOR 24-HOUR AUTOMATED ACCESS TO YOUR 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.
[LOGO]
SKYLINE FUNDS
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
<PAGE>
SEMI-ANNUAL REPORT - 2ND QUARTER 1998
SKYLINE SMALL CAP
VALUE PLUS
- ----------------------
JUNE 30, 1998
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
[LOGO]
SKYLINE FUNDS
<PAGE>
LETTER FROM KENNETH S. KAILIN, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
August 3, 1998
Dear Shareholder:
While the overall stock market returns in the first half of 1998 were solid on
an absolute and relative basis, generating positive returns in the second
quarter proved elusive. Specifically, the Fund fell 5.91% in the second quarter
but returned a healthy 6.12% for the first six months of 1998. In the second
quarter, the Fund underperformed the Russell 2000 Index, our small stock
benchmark. However, the Fund has outperformed the benchmark for the six-month,
one-year, three-year, and five-year periods.
MARKET REVIEW
As measured by the Russell 2000 Index and the S&P 500 Index, small company
stocks underperformed large company stocks in the second quarter. In fact, while
the Russell 2000 dropped 4.66% in the quarter, the S&P 500 rose 3.32%, almost an
8% difference in only a three-month period. The most widely cited factor was a
preference for large and perceived "safe" companies. Investors, it appears, were
influenced by the potential impact Asia's severe economic troubles could have on
U.S. businesses. While the U.S. economy is likely to slow, many of these Asian-
related fears seem excessive.
Clearly, small stocks were out of favor in the second quarter, with every major
Russell 2000 sector declining in the quarter. According to Morningstar, Inc.,
small cap value managers underperformed small cap growth managers modestly in
the second quarter. Consumer stocks were relatively strong performers for many
growth managers, as unemployment was low and consumer confidence was high. Value
managers, however, were hurt by holdings in cyclical firms. Energy stocks were
once again hit hard in the quarter and did not help either growth or value
managers of small stocks. On a relative basis, interest rate sensitive groups
like financials and utilities held up reasonably well.
PORTFOLIO REVIEW
The Fund's performance was disappointing in the second quarter. Small company
stocks in general corrected sharply during this period, and the Fund's stock
selection was substandard mainly due to deteriorating corporate fundamentals.
The largest sectors of the Fund in the second quarter consisted of consumer and
financial stocks. Together, these broad areas represented nearly half of the
Fund's holdings. Consumer discretionary stocks in the Fund, while modestly
underperforming the corresponding benchmark sector, held up relatively well this
quarter. Healthy consumer demand drove strong positive returns in the quarter
for several stocks in the consumer discretionary sector. Examples are: Fingerhut
Companies, Inc.; Kellwood Company; Claire's Stores, Inc.; Zale Corp.; and Tommy
Hilfiger Corp. These returns were offset by disappointing business trends in
other consumer-related areas such as staffing services, where demand slowed
unexpectedly.
SEMI-ANNUAL REPORT - JUNE 30, 1998 1
<PAGE>
Financial stocks in the Fund seemed to be hurt by profit taking and our exposure
to the out of favor real estate industry. Fundamentals for the vast majority of
the Fund's financial holdings continue to be quite strong, and over time, the
stock prices should follow the underlying business trends.
The worst performing sector for the Fund was technology. This sector is an area
we had recently found attractive for long term appreciation. Unfortunately, near
term demand for technology products has been sluggish and selling prices have
been falling. Valuations, however, are very compelling and we are confident
technology demand will improve with time.
Another weak area for the Fund in the quarter was producer durables. Several
weak stock selections, combined with fears of a slowing U.S. economy, led to
negative overall group returns. Many of the weak stock selections resulted from
profit disappointments due to sluggish demand trends, while other selections
fell simply on concerns of a possible slowdown in earnings growth in the future.
The U.S. economy does appear to be slowing, however, it is still expected to
show healthy growth in the near future. Our cyclical holdings reflect a fund of
inexpensive stocks with nice growth prospects.
Overall, the combination of weakening business conditions in some holdings and
profit taking in others led to poor stock returns in many areas.
OUTLOOK
The impact of economic woes in Asia, a strong dollar, and the prolonged effects
of the now settled General Motors strike in the U.S. should slow down the U.S.
economy. More companies will find it harder to meet many investors' lofty profit
expectations in a slowing economy. However, low unemployment, high consumer
confidence, and low interest rates should create reasonably good business
conditions for future profit growth.
Large company stocks continue to sell at extraordinarily high valuation levels,
while Asian and foreign currency exposure will likely pressure both future
product demand and profit margins. Small company stocks continue to underperform
large company stocks despite more attractive valuation levels and better profit
growth potential. We believe, at some point in time, investors will return
aggressively to small stock investing, however, a catalyst is needed to change
current investor psychology. As each day passes, we believe we come closer to a
better period for small stock investing.
The recent correction in small company stocks has created a number of very
interesting investment opportunities. Minor disappointments in profit growth and
liquidity-driven selling pressures have pushed a large number of small company
stocks down by huge percentages. This situation has created even more value in
small company stocks. The Fund should be well-situated for a sustained
turnaround in small company stocks due to its focus on a broad range of
companies with attractive near term profit growth potential and compelling
valuation.
/s/ Kenneth S. Kailin
2 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
VALUE PLUS RUSSELL 2000
<S> <C> <C>
P/E RATIO (MEDIAN) 17.4 22.1
PRICE/BOOK 2.32 2.68
PRICE/SALES 0.95 1.43
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 13.2% 18.8%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $970 million $740 million
PORTFOLIO VALUE $164 million $940 billion
NUMBER OF HOLDINGS 52 2,000
- --------------------------------------------------------------------------------
TICKER SYMBOL: SPEQX
CUSIP #: 830833406
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</TABLE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS(2) % OF NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
FINGERHUT COMPANIES, INC.
Catalog retailer 3.1%
ENHANCE FINANCIAL SERVICES GROUP
Specialty reinsurance 3.0%
UNITED STATIONERS INC.
Office products distributor 3.0%
GENERAL CABLE CORP.
Wire & cable producer 2.9%
PENTAIR, INC.
Diversified manufacturer 2.8%
INTEGRATED HEALTH SERVICES, INC.
Sub-acute health care services 2.7%
MARQUETTE MEDICAL SYSTEMS, INC.
Monitoring equipment 2.6%
FIRST BRANDS CORP.
Consumer products 2.6%
HCC INSURANCE HOLDINGS, INC.
Property & casualty insurance 2.5%
TRIGON HEALTHCARE, INC.
Health maintenance organization 2.5%
TOP TEN HOLDINGS 27.7%
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 3
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2Q YTD
1998 1998 1 yr. 3 yrs 5 yrs.
<S> <C> <C> <C> <C> <C>
SMALL CAP VALUE PLUS -5.91 6.12 17.49 24.25 17.21
RUSSELL 2000 -4.66 4.93 16.50 18.85 16.05
</TABLE>
SECTOR WEIGHTINGS (as of June 30, 1998)
- --------------------------------------------------------------------------------
[CHART]
<TABLE>
<S> <C>
Autos & Transportation 2.8%
Consumer Discretionary 20.3%
Consumer Staples 4.1%
Energy 3.2%
Financial Services 24.1%
Health Care 11.9%
Materials & Processing 5.2%
Producer Durables 13.7%
Technology 11.2%
Cash 3.5%
</TABLE>
4 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Calendar Years
Since --------------------------------------------------------
Inception(3) 1997 1996 1995 1994 1993(3)
<S> <C> <C> <C> <C> <C>
15.98 26.2 26.6 21.0 -1.5 10.1
15.22 22.4 16.5 28.4 -1.8 13.8
</TABLE>
SECTOR PERFORMANCE (as of June 30, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2Q 1998 YTD 1998
-------------------- ---------------------
SMALL CAP RUSSELL SMALL CAP RUSSELL
VALUE PLUS 2000 VALUE PLUS 2000
<S> <C> <C> <C> <C>
AUTOS & TRANSPORTATION 13.8% -0.6% 20.8% 12.6%
------------------------------------------------------
MATERIALS & PROCESSING 6.0 -6.0 18.0 5.3
------------------------------------------------------
OTHER 0.0 -11.1 0.0 -2.3
------------------------------------------------------
UTILITIES 0.0 -1.3 0.0 10.7
------------------------------------------------------
HEALTH CARE -2.2 -10.0 15.2 -2.2
------------------------------------------------------
CONSUMER DISCRETIONARY -2.8 -1.2 14.6 13.6
------------------------------------------------------
FINANCIAL SERVICES -6.1 -2.4 4.4 2.6
------------------------------------------------------
CONSUMER STAPLES -6.8 -6.1 -0.7 1.7
------------------------------------------------------
ENERGY -7.8 -13.3 -10.5 -13.8
------------------------------------------------------
PRODUCER DURABLES -10.5 -8.5 3.5 2.5
------------------------------------------------------
TECHNOLOGY -17.5 -6.2 -6.4 7.0
------------------------------------------------------
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 5
<PAGE>
STOCK HIGHLIGHTS(2)
- --------------------------------------------------------------------------------
COVENANT TRANSPORT, INC. (CVTI)
CVTI is a specialized trucking company that focuses on just-in-time full
truckload service. CVTI uses team drivers (two drivers per truck) to provide
transcontinental service with the ability to deliver goods within a 15 minute
predetermined time window. CVTI provides this time critical delivery service at
a cost 20% less than that of air freight. In addition, there are few competitors
of significance. The advantages of focusing on this kind of service are higher
rates, greater equipment utilization, better pay for drivers, and higher
returns. CVTI was formed in 1986 with 25 trucks and today operates over 2,200
trucks. Earnings are growing quickly, and the stock trades at a relatively low
valuation level.
ENHANCE FINANCIAL SERVICES GROUP (EFS)
EFS is a rapidly growing specialty insurer. EFS provides specialty insurance and
reinsurance products that focus on credit related risks. Because of the focus on
unique niche markets, the vast majority of EFS' insurance products will
experience no losses from claims. EFS continues to leverage its highly
specialized knowledge into several non-insurance business areas. The expansion
into these newer markets is a key driver of future growth. Management expects to
generate very strong profit growth, and the stock is very reasonably valued.
NOTES TO PERFORMANCE
(1) The performance for the one, three, and five years ended June 30, 1998,
and for the period February 9, 1993 (inception) through June 30, 1998, is
an average annual total return calculation which is described in the
Fund's prospectus. Of course, past performance is no guarantee of future
results. The principal value and return on your investment will fluctuate
and on redemption may be worth more or less than your original cost.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. All indexes and Fund characteristics
are compiled by Frank Russell Company.
Morningstar, Inc. is a highly regarded independent research firm that
compiles performance data on mutual funds.
(2) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
(3) Return is calculated from the Fund's inception on February 9, 1993.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor Inc.
6 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY.
SEMI-ANNUAL REPORT - JUNE 30, 1998 7
<PAGE>
PORTFOLIO HOLDINGS as of June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
------------------------ ----------- -------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 2.8%
AUTO RELATED - 1.3%
Dura Automotive
Systems, Inc.(a) OEM auto parts producer 68,300 $ 2,194,137
TRUCKING - 1.5%
Covenant Transport, Inc.(a) Specialty truckload carrier 122,300 2,384,850
-------------
TOTAL AUTOS & TRANSPORTATION 4,578,987
CONSUMER DISCRETIONARY - 20.3%
APPAREL/TEXTILES - 2.2%
Gildan Activewear Inc.(a) Apparel maker 215,700 1,402,050
Kellwood Co. Apparel manufacturer 59,600 2,130,700
-------------
3,532,750
COMMERCIAL SERVICES - 5.3%
Alternative Resources Corp.(a) Technical staffing 215,200 2,663,100
CDI Corp.(a) Temporary personnel 44,300 1,185,025
United Stationers Inc.(a) Office products distributor 75,500 4,888,625
-------------
8,736,750
CONSUMER PRODUCTS/SERVICES - 2.5%
Harman Int'l Industries, Inc. Audio equipment 39,400 1,516,900
Libbey Inc. Glass tableware 68,900 2,639,731
-------------
4,156,631
PRINTING/PUBLISHING - 2.1%
World Color Press, Inc.(a) Commercial printer 100,400 3,514,000
RETAIL - 8.2%
Brylane Inc.(a) Specialty apparel catalogs 43,300 1,991,800
Claire's Stores, Inc. Fashion accessories stores 166,700 3,417,350
Fingerhut Companies, Inc. Catalog retailer 154,700 5,105,100
Zale Corp.(a) Jewelry retailer 90,500 2,879,031
-------------
13,393,281
-------------
TOTAL CONSUMER DISCRETIONARY 33,333,412
CONSUMER STAPLES - 4.1%
First Brands Corp. Consumer products 167,000 4,279,375
International Multifoods Corp. Foodservice distribution 91,300 2,510,750
-------------
TOTAL CONSUMER STAPLES 6,790,125
</TABLE>
8 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
------------------------ ----------- -------------
<S> <C> <C> <C>
ENERGY - 3.2%
EXPLORATION & PRODUCTION - 3.2%
Newfield Exploration Co.(a) Oil & gas producer 136,100 $ 3,385,487
Swift Energy Co.(a) Oil & gas producer 120,100 1,914,094
-------------
TOTAL ENERGY 5,299,581
FINANCIAL SERVICES - 24.1%
BANKS/THRIFTS - 2.4%
Peoples Heritage Financial
Group Maine-based thrift 165,400 3,907,575
INSURANCE - 14.7%
American Heritage Life
Investment Life insurance 112,200 2,594,625
CMAC Investment Corp. Mortgage insurance 63,000 3,874,500
Enhance Financial
Services Grp Inc. Specialty reinsurance 145,600 4,914,000
Fremont General Corp. Workers' comp. insurance 66,900 3,625,144
HCC Insurance Holdings, Inc. P&C insurance 185,000 4,070,000
Highlands Insurance
Group, Inc.(a) P&C insurance 82,600 1,528,100
Horace Mann Educators Corp. P&C insurance 102,400 3,532,800
-------------
24,139,169
OTHER FINANCIAL SERVICES - 1.6%
FIRSTPLUS Financial
Group, Inc.(a) Consumer finance 70,900 2,552,400
REAL ESTATE INVESTMENT TRUSTS - 5.4%
American General
Hospitality Corp. Hotel properties REIT 161,400 3,429,750
Parkway Properties, Inc. Office buildings REIT 72,000 2,124,000
Prentiss Properties Trust Office/industrial REIT 135,800 3,301,637
-------------
8,855,387
-------------
TOTAL FINANCIAL SERVICES 39,454,531
HEALTH CARE - 11.9%
HEALTH CARE SERVICES - 5.1%
Integrated Health Services, Inc. Sub-acute health care srvcs. 116,100 4,353,750
Trigon Healthcare, Inc.(a) Health maintenance organ. 112,200 4,060,238
-------------
8,413,988
MEDICAL EQUIPMENT/PRODUCTS - 6.8%
Arrow International, Inc. Disposable catheters prod. 86,300 2,367,856
DENTSPLY International Inc. Dental prods. manufacturer 97,200 2,430,000
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 9
<PAGE>
PORTFOLIO HOLDINGS as of June 30, 1998 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
------------------------ ----------- -------------
<S> <C> <C> <C>
Marquette Medical
Systems, Inc.(a) Monitoring equipment 168,300 $ 4,317,946
Sola International Inc.(a) Eyeglass lenses producer 63,000 2,059,312
-------------
11,175,114
-------------
TOTAL HEALTH CARE 19,589,102
MATERIALS & PROCESSING - 5.2%
BUILDING/CONSTRUCTION PRODUCTS - 1.1%
Hughes Supply Inc. Construction/indust. supplies 52,750 1,931,969
METAL FABRICATIONS - 2.0%
Wolverine Tube, Inc.(a) Copper tubing products 84,400 3,207,200
SPECIALTY CHEMICALS - 2.1%
International Specialty
Products Inc.(a) Fine chemicals 180,900 3,369,263
-------------
TOTAL MATERIALS & PROCESSING 8,508,432
PRODUCER DURABLES - 13.7%
AEROSPACE RELATED - 3.2%
DeCrane Aircraft Holdings, Inc.(a) Aerospace parts manufact. 149,600 2,599,300
TriStar Aerospace Co.(a) Distributes aerospace prods. 175,200 2,715,600
-------------
5,314,900
ELECTRICAL EQUIPMENT/PRODUCTS - 5.8%
Belden Inc. Wire & cable manufacturer 43,500 1,332,188
General Cable Corp. Wire & cable producer 164,450 4,748,494
MagneTek, Inc.(a) Integrated electrical prods. 214,600 3,379,950
-------------
9,460,632
OTHER PRODUCER DURABLES - 4.7%
Coltec Industries Inc.(a) Diversified manufacturer 161,400 3,207,825
Pentair, Inc. Diversified manufacturer 106,300 4,517,750
-------------
7,725,575
-------------
TOTAL PRODUCER DURABLES 22,501,107
TECHNOLOGY - 11.2%
CONTRACT MANUFACTURING - 2.8%
DII Group, Inc. (The)(a) Electronics manufacturing 153,800 2,624,213
International Manufacturing
Services Electronics manufacturing 293,600 1,981,800
-------------
4,606,013
</TABLE>
10 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
------------------------ ----------- -------------
<S> <C> <C> <C>
DISTRIBUTION - 4.2%
Anixter International Inc.(a) Networking products 193,000 $ 3,679,063
CHS Electronics, Inc.(a) Computer distributor 181,300 3,240,738
-------------
6,919,801
ELECTRONIC COMPONENTS - 2.3%
Artesyn Technologies, Inc.(a) Power supplies 238,200 3,811,200
OTHER TECHNOLOGY - 1.9%
Coherent, Inc.(a) Laser manufacturer 177,400 3,043,518
-------------
TOTAL TECHNOLOGY 18,380,532
-------------
TOTAL COMMON STOCKS - 96.5%
(Cost $140,962,764) 158,435,809
MONEY MARKET INSTRUMENTS(b)
Yield 5.27%
due August 1998 to September 1998
Johnson Controls, Inc. 3,843,226
Pitney Bowes Credit Corp. 3,882,890
-------------
TOTAL MONEY MARKET INSTRUMENTS - 4.7%
(Cost: $7,726,116) 7,726,116
-------------
TOTAL INVESTMENTS - 101.2%
(Cost $148,688,880) 166,161,925
OTHER LIABILITIES LESS ASSETS - (1.2%) (1,947,861)
-------------
NET ASSETS - 100% $ 164,214,064
-------------
-------------
</TABLE>
(a) Non-income producing security.
(b) Variable rate securities. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on June 30, 1998.
Based on cost of investments for federal income tax purposes of $148,688,880 on
June 30, 1998, net unrealized appreciation was $17,473,045, consisting of gross
unrealized appreciation of $28,443,146 and gross unrealized depreciation of
$10,970,101.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1998 11
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost:$148,688,880) $ 166,161,925
Receivable for:
Securities sold $ 300,143
Dividends and interest 261,532
Shares sold 140,301 701,976
------------
Organization costs, net of accumulated
amortization of $18,434 3,807
--------------
Total assets 166,867,708
--------------
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 1,503,511
Shares redeemed 934,949
Comprehensive management fee 202,168
Trustees' fees 1,066
Organization costs 11,950 2,653,644
------------ -------------
Net assets applicable to shares
outstanding $ 164,214,064
-------------
-------------
Shares outstanding--no par value
(unlimited number of shares authorized) 12,139,886
-------------
-------------
PRICING OF SHARES
Net asset value, offering price, and
redemption price per share $ 13.53
-------------
-------------
ANALYSIS OF NET ASSETS
Paid-in capital $ 132,048,589
Undistributed net realized gain on
sales of investments 15,030,357
Unrealized appreciation of investments 17,473,045
Accumulated net investment loss (337,927)
-------------
Net assets applicable to shares outstanding $ 164,214,064
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
12 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
STATEMENT OF OPERATIONS Six Months Ended June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 667,726
Interest 310,537
--------------
Total investment income 978,263
Expenses:
Comprehensive management fee 1,307,089
Fees to unaffiliated trustees 7,756
Amortization of organization costs 1,345
--------------
Total expenses 1,316,190
--------------
Net investment loss (337,927)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 13,795,948
Net change in unrealized appreciation (2,858,585)
--------------
Net realized and unrealized gain on investments 10,937,363
--------------
Net increase in net assets resulting from operations $ 10,599,436
--------------
--------------
</TABLE>
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1998 13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended 6/30/98 Year ended
(unaudited) 12/31/97
----------------- ---------------
<S> <C> <C>
From operations:
Net investment loss $ (337,927) $ (394,072)
Net realized gain on sales of
investments 13,795,948 22,856,580
Net change in unrealized appreciation (2,858,585) 7,533,967
---------------- ---------------
Net increase in net assets resulting
from operations 10,599,436 29,996,475
Distributions to shareholders from:
Net realized gains -- (25,152,661)
---------------- ---------------
Total distributions -- (25,152,661)
From share transactions:
Proceeds from shares sold 45,525,049 124,093,499
Reinvestments of dividends
and capital gain distributions -- 24,674,327
Payments for shares redeemed (57,597,193) (93,257,451)
---------------- ---------------
Net (decrease) increase in net assets
resulting from share transactions (12,072,144) 55,510,375
---------------- ---------------
Total (decrease) increase in net assets (1,472,708) 60,354,189
Net assets at beginning of period 165,686,772 105,332,583
---------------- ---------------
Net assets at end of period $ 164,214,064 $ 165,686,772
---------------- ---------------
---------------- ---------------
</TABLE>
See accompanying notes to financial statements.
14 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Year Year Year
Ended 6/30/98 Ended Ended Ended Ended
(unaudited) 12/31/97 12/31/96 12/31/95 12/31/94
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.75 $ 11.94 $ 11.29 $ 10.14 $ 10.79
--------- ---------- --------- ---------- ----------
Income from investment
operations
Net investment (loss) income (0.03) (0.03) (0.02) 0.06 0.02
Net realized and unrealized
gain (loss) on investments 0.81 3.13 2.94 2.06 (0.19)
--------- ---------- --------- ---------- ----------
Total from investment
operations 0.78 3.10 2.92 2.12 (0.17)
--------- ---------- --------- ---------- ----------
Less distributions from:
Dividends from net
investment income -- -- (0.01) (0.06) (0.02)
Dividends from net realized
gains on investments -- (2.29) (2.26) (0.91) (0.46)
--------- ---------- --------- ---------- ----------
Total distributions -- (2.29) (2.27) (0.97) (0.48)
--------- ---------- --------- ---------- ----------
Net asset value at end of
period $ 13.53 $ 12.75 $ 11.94 $ 11.29 $ 10.14
--------- ---------- --------- ---------- ----------
--------- ---------- --------- ---------- ----------
Total Return 6.12%(a) 26.21% 26.60% 20.95% (1.52%)
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.51%(b) 1.51% 1.53% 1.52% 1.51%
Ratio of net investment
(loss) income to
average net assets (0.38%)(b) (0.30%) (0.24%) 0.50% 0.22%
Portfolio turnover rate 108%(b) 104% 145% 102% 82%
Net assets, end of period
(in thousands) $ 164,214 $ 165,687 $ 105,333 $ 89,203 $ 99,638
--------- ---------- --------- ---------- ----------
--------- ---------- --------- ---------- ----------
</TABLE>
Average commission rate paid on stock transactions for the six months ended June
30, 1998 was $0.0571 per share. Average commission rates paid on stock
transactions for the years ended December 31, 1997 and December 31, 1996, were
$0.0601 and $0.0619 per share, respectively.
Effective August 31, 1995, the Fund's Investment Adviser changed from Mesirow
Asset Management, Inc., to Skyline Asset Management, L.P.
(a) For the six months ended June 30, 1998.
(b) Ratios have been determined on an annualized basis.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1998 15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Skyline Funds is an open-ended, diversified investment management company which
consists of Special Equities Portfolio, Small Cap Value Plus, 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 (formerly
Special Equities II) on February 9, 1993, and Small Cap Contrarian on December
15, 1997. The following notes relate solely to the accompanying financial
statements of Small Cap Value Plus ("Fund").
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
- - SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed), and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of money market instrument
premium and discount. Realized gains and losses from security transactions are
reported on an identified cost basis.
- - FUND SHARE VALUATION - Fund shares are sold on a continuous basis and
redeemed on a continuous basis at net asset value. Net asset value per share is
determined as of the close of regular session trading on the New York Stock
Exchange (normally 3:00 p.m. Central time) each day the Exchange is open for
trading. The net asset value per share is determined by dividing the value of
all securities and other assets, less liabilities, by the number of shares of
the Fund outstanding.
- - FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund's policy to comply with the special provisions of the Internal Revenue
Code available to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income. Such provisions were complied
with and, therefore, no federal income taxes have been accrued.
- - EXPENSES - Expenses arising in connection with a Fund are allocated to that
Fund. Other Skyline Funds' expenses, such as trustees' fees, are allocated among
the three Skyline Funds.
16 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
- --------------------------------------------------------------------------------
2
TRANSACTIONS WITH AFFILIATES
The Fund's Investment Adviser is Skyline Asset Management, L.P. ("Adviser"). For
the Adviser's management and advisory services and the assumption of most of the
Fund's ordinary operating expenses, the Fund pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total comprehensive management
fee charged for the six months ended June 30, 1998 was $1,307,089.
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, 1998, fees of $7,756 were paid by the Fund to
the unaffiliated trustees.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
Six Months Ended Year ended
6/30/98 12/31/97
--------------------------------
<S> <C> <C>
Shares sold 3,311,155 9,132,124
Shares issued
in reinvestment of dividends -- 1,959,834
------------ ------------
3,311,155 11,091,958
Less shares redeemed (4,169,573) (6,913,355)
------------ ------------
Net (decrease) increase in
shares outstanding (858,418) 4,178,603
------------ ------------
------------ ------------
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the six
months ended June 30, 1998 are as follows:
<TABLE>
<S> <C>
Cost of purchases $ 88,472,343
Proceeds from sales 97,375,775
</TABLE>
REPORT FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
This report, including the unaudited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
18 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY.
SEMI-ANNUAL REPORT - JUNE 30, 1998 19
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY.
20 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
FOR 24-HOUR AUTOMATED ACCESS TO YOUR 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.
- --------------------------------------------------------------------------------
[LOGO]
SKYLINE FUNDS
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
<PAGE>
[GRAPHIC]
SEMI-ANNUAL REPORT - 2ND QUARTER 1998
SKYLINE SMALL CAP CONTRARIAN
- ----------------------------------
JUNE 30, 1998
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
[LOGO]
SKYLINE FUNDS
<PAGE>
LETTER FROM DAREN C. HEITMAN, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
August 3, 1998
Dear Shareholder:
The Fund's performance during the quarter was a bit disappointing. The Fund
declined 9.09% since the first quarter, putting the NAV back to $10.00 per share
at the end of June. This compares unfavorably to the Russell 2000 Index's 4.66%
decline during the period and the 3.32% rise in the S&P 500 Index. Year to date,
the Fund is unchanged compared to a 4.93% rise in the Russell 2000 and a 17.75%
gain for the S&P 500.
Two issues seem to jump off the page from the proceeding paragraph, and I will
address each. First, small caps once again significantly underperformed large
cap stocks. Second, the Fund lagged its small cap benchmark.
PERFORMANCE REVIEW
The weak performance of small cap stocks made investing in this sector difficult
during the second quarter. Large cap stocks as represented by the S&P 500
outperformed smaller stocks as represented by the Russell 2000 for the
thirteenth time in the past 16 quarters. The explanation, however, cannot lie in
faster growth by large companies. In fact, one study concluded that, in the
first quarter, profits of small companies grew 10% faster than the profits of
large companies, and a similar discrepancy in growth rates was predicted for the
second quarter. We believe the relative performance in the second quarter can be
explained by a "flight to quality" in the stock market. Some signs emerged
midway through the quarter that the U.S. economy might be slowing. During
periods of uncertainty, investors often move their equity investments to larger,
more established companies, leaving small company stocks behind, regardless of
valuation. However, this combination of extended price underperformance but
better profit growth has stretched relative valuations for small cap stocks to
all-time lows. If the U.S. economy cooperates by delivering continued expansion,
we believe the table is set for small cap stocks to begin outperforming large
cap stocks.
The explanation for the Fund's performance is an extension of our view of the
market. While we had more than an acceptable number of firms pre-announcing poor
earnings this quarter, the decline was broad-based and included many stocks of
companies whose earnings outlooks have not materially changed. Our unscientific
hypothesis is that the poor environment for small cap stocks outlined above is
magnified by our contrarian style of investing. Simply put, portfolio managers
are more likely to sell the stocks of companies with poor near-term earnings
growth in a difficult market, creating selling pressure for most of the types of
stocks we like to own. This explanation only holds up in the short term.
Ultimately, the companies in the Fund must show a fundamental turnaround in
their financial results or the explanation for underperformance becomes poor
stock selection.
SEMI-ANNUAL REPORT - JUNE 30, 1998 1
<PAGE>
Besides the macro factors described on the previous page, the Fund's performance
was hindered by our technology holdings. Despite a very tough environment for
these companies in the first quarter, conditions worsened further in the second
quarter with little hope for a near-term turnaround. Much of the weakness in
company fundamentals can be traced to the Asian crisis and the related drop-off
in demand for technology products. While the stocks we held were already very
inexpensive, a handful declined significantly in price due to pre-announced
shortfalls in second quarter results.
OUTLOOK
There are two keys to successful contrarian investing: 1) be right about the
company's competitive position and earnings potential; and 2) be patient
enough to still own the stock when the turnaround occurs. In the short term,
non-fundamental factors can influence a stock price. However, the stock price
does not always tell the whole story, and I am still very optimistic
regarding the outlook for the companies in the Fund. In time, we believe many
of the companies will deliver proof of the earnings potential we estimated
when the stocks were purchased. Given their extremely low valuation, with
many below book value, the stocks should perform very well with a turnaround
in the companies' financial results. A better environment for small cap
investing would create even more tailwind.
/s/ Darin Heitman
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
CONTRARIAN RUSSELL 2000 S&P 500
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PRICE/BOOK 1.19 2.68 4.49
PRICE/SALES 0.57 1.43 1.92
P/E RATIO (MEDIAN) 32.1 22.1 22.9
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 19.2% 18.8% 10.1%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $180 million $740 million $50 billion
PORTFOLIO VALUE $8 million $940 billion $8,934 billion
NUMBER OF HOLDINGS 42 2,000 500
- --------------------------------------------------------------------------------
CUSIP #: 830833604
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</TABLE>
2 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2Q YTD Since
1998 1998 Inception(2)
<S> <C> <C> <C>
SMALL CAP CONTRARIAN -9.09 0.00 0.00
RUSSELL 2000 -4.66 4.93 9.03
S&P 500 3.32 17.75 18.69
</TABLE>
SECTOR WEIGHTINGS (AS OF JUNE 30, 1998)
- --------------------------------------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
<S> <C>
Other 2.9%
Technology 15.7%
Cash 5.4%
Autos & Transportation 8.5%
Producer Durables 7.7%
Materials & Processing 11.2%
Consumer Discretionary 23.4%
Health Care 12.3%
Energy 4.6%
Financial Services 8.3%
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 3
<PAGE>
SECTOR PERFORMANCE (AS OF JUNE 30, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2Q 1998 YTD 1998
----------------------- ----------------------
SMALL CAP RUSSELL SMALL CAP RUSSELL
CONTRARIAN 2000 CONTRARIAN 2000
<S> <C> <C> <C> <C>
CONSUMER DISCRETIONARY 4.0% -1.2% 23.3% 13.6%
--------------------------------------------------
OTHER 1.4 -11.1 9.5 -2.3
--------------------------------------------------
PRODUCER DURABLES 0.2 -8.5 14.4 2.5
--------------------------------------------------
MATERIALS & PROCESSING 0.1 -6.0 -11.6 5.3
--------------------------------------------------
CONSUMER STAPLES 0.0 -6.1 91.8 1.7
--------------------------------------------------
UTILITIES 0.0 -1.3 0.0 10.7
--------------------------------------------------
HEALTH CARE -3.5 -10.0 -3.4 -2.2
--------------------------------------------------
FINANCIAL SERVICES -13.1 -2.4 -2.7 2.6
--------------------------------------------------
AUTOS & TRANSPORTATION -13.6 -0.6 17.9 12.6
--------------------------------------------------
ENERGY -16.0 -13.3 -14.6 -13.8
--------------------------------------------------
TECHNOLOGY -32.6 -6.2 -31.7 7.0
--------------------------------------------------
</TABLE>
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
LECHTERS, INC. (LECH)
Lechters, Inc. operates two retail chains, Lechters Housewares and Famous Brands
Housewares Outlet, that offer housewares and kitchen items. Famous Brands has
historically carried the same merchandise as Lechters Housewares stores despite
the stores' locations in outlet shopping malls. LECH's new management team is in
the midst of transitioning Famous Brands' merchandise to true closeout items and
other special purchases, which should result in greater revenue and
profitability per store. Additionally, the Lechters Housewares chain is
benefiting from a move away from high-cost, low-traffic shopping malls to strip
malls and city centers. Despite the potential for each chain to improve profits
dramatically, the stock is selling at 50% of book value, 85% of working capital
less long-term debt, and 20% of revenue.
UNISOURCE WORLDWIDE INC. (UWW)
UWW operates two distribution businesses, one for paper products and one for
maintenance supplies. UWW grew to more than $7 billion in revenue primarily
through acquisitions and is now embarking on a restructuring plan to increase
profitability. Plans include closing facilities, realizing purchasing
leverage, and culling unprofitable accounts. If management's goals are
achieved, UWW should generate earnings in excess of $2.00 per share by the
end of the three-year plan. Despite UWW's leading market position in a
relatively basic industry, the shares trade near book value and at a very low
multiple of UWW's earnings potential.
4 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
<TABLE>
<CAPTION>
Top Ten Holdings(3) % OF NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
UNIT INSTRUMENTS, INC.
Gas flow controllers 3.8%
ATCHISON CASTING CORP.
Steel & iron castings 3.6%
QUEST DIAGNOSTICS INC.
Diagnostic testing services 3.5%
AMERICAN RESIDENTIAL SERVICES
HVAC repair services 3.3%
INSURANCE AUTO AUCTIONS, INC.
Auto salvage 3.2%
IMATION CORP.
Data storage products 3.1%
RIGHT MANAGEMENT CONSULTANTS
Outplacement & HR services 3.1%
BROWN & SHARPE MANUFACTURING
Metrology instruments 3.0%
WILLBROS GROUP INC.
Engineering/construction firm 3.0%
LADD FURNITURE, INC.
Furniture manufacturer 2.9%
TOP TEN HOLDINGS 32.5%
</TABLE>
NOTES TO PERFORMANCE
(1) The performance for the period December 15, 1997 (inception) through June
30, 1998 is an annual total return calculation which is described in the
Fund's prospectus. Of course, past performance is no guarantee of future
results. The principal value and return on your investment will fluctuate
and on redemption may be worth more or less than your original cost.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. The S&P 500 Index, a widely quoted
stock market index, includes 500 of the largest companies publicly traded
in America. All figures take into account reinvested dividends. All indexes
and Fund characteristics are compiled by Frank Russell Company.
(2) Return is calculated from the Fund's inception on December 15, 1997.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor Inc.
SEMI-ANNUAL REPORT - JUNE 30, 1998 5
<PAGE>
PORTFOLIO HOLDINGS as of June 30, 1998 (unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
COMMON STOCKS -------------------- --------- ----------
<S> <C> <C> <C>
AUTOS & TRANSPORTATION - 8.5%
OTHER TRANSPORTATION - 6.7%
Kitty Hawk, Inc.(a) Air freight services 3,200 $ 54,400
Mesa Air Group, Inc.(a) Regional airline 22,000 178,750
Pittston Burlington Group Air freight services 7,600 118,275
Trailer Bridge, Inc.(a) Marine transportation 43,000 172,000
----------
523,425
RAILROAD - 1.8%
RailTex, Inc.(a) Freight services 10,600 140,450
----------
TOTAL AUTOS & TRANSPORTATION 663,875
CONSUMER DISCRETIONARY - 23.4%
COMMERCIAL SERVICES - 10.3%
Angelica Corp. Textile rental services 7,700 161,700
Insurance Auto Auctions, Inc.(a) Auto salvage 17,600 248,600
Right Mgmt Consultants(a) Outplacement & HR services 17,700 238,950
Unisource Worldwide, Inc. Paper/shipping supplies 14,300 154,619
----------
803,869
CONSUMER PRODUCTS/SERVICES - 4.6%
Drypers Corp.(a) Makes disposable diapers 19,900 129,350
LADD Furniture, Inc.(a) Furniture manufacturer 7,600 228,000
----------
357,350
RETAIL - 8.5%
Charming Shoppes, Inc.(a) Women's apparel 26,800 127,300
Discount Auto Parts, Inc.(a) Auto parts stores 4,800 124,800
Factory Card Outlet Corp.(a) Party supply stores 9,800 71,050
Lechters, Inc.(a) Housewares chain 43,100 211,459
Tractor Supply Co.(a) Farm-related products 4,900 121,888
----------
656,497
----------
TOTAL CONSUMER DISCRETIONARY 1,817,716
ENERGY - 4.6%
EXPLORATION & PRODUCTION - 1.6%
Comstock Resources, Inc.(a) Oil & gas producer 16,600 123,462
OTHER ENERGY - 3.0%
Willbros Group Inc.(a) Engineering/construction firm 15,000 234,375
----------
TOTAL ENERGY 357,837
</TABLE>
6 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
COMMON STOCKS -------------------- --------- ----------
<S> <C> <C> <C>
FINANCIAL SERVICES - 8.3%
INSURANCE - 6.5%
GAINSCO, INC. P&C insurance 18,400 $ 120,750
Highlands Insurance
Group, Inc.(a) P&C insurance 10,400 192,400
Navigators Group, Inc. (The)(a) P&C insurance 10,300 195,056
----------
$508,206
OTHER FINANCIAL SERVICES - 1.8%
Credit Acceptance Corp.(a) Automobile finance services 16,500 140,250
TOTAL FINANCIAL SERVICES $648,456
HEALTH CARE - 12.3%
HEALTH CARE SERVICES - 9.9%
ClinTrials Research Inc.(a) Contract research firm 26,500 129,188
Coram Healthcare Corp.(a) Home infusion services 84,600 163,912
Quest Diagnostics Inc.(a) Diagnostic testing services 12,400 271,250
Trigon Healthcare, Inc.(a) Health maintenance organ. 5,600 202,650
----------
767,000
MEDICAL EQUIPMENT/PRODUCTS - 2.4%
Allied Healthcare
Products, Inc.(a) Makes respiratory products 37,800 184,275
----------
TOTAL HEALTH CARE 951,275
MATERIALS & PROCESSING - 11.2%
BUILDING/CONSTRUCTION PRODUCTS - 3.3%
American Residential
Services(a) HVAC repair services 22,600 254,250
INDUSTRIAL PRODUCTS - 2.4%
Global Industrial
Technologies, Inc.(a) Conglomerate 13,300 191,188
METAL FABRICATIONS - 3.6%
Atchison Casting Corp.(a) Steel & iron castings 15,700 280,638
STEEL/IRON - 1.9%
Birmingham Steel Corp. Steel mini-mill 11,700 144,788
----------
TOTAL MATERIALS & PROCESSING 870,864
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 7
<PAGE>
PORTFOLIO HOLDINGS as of June 30, 1998 (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
COMMON STOCKS -------------------- --------- ----------
<S> <C> <C> <C>
PRODUCER DURABLES - 7.7%
ELECTRICAL EQUIPMENT/PRODUCTS - 2.2%
Sensormatic Electronics Corp.(a) Anti-theft devices 11,900 $ 166,600
MACHINERY - 5.5%
Binks-Sames Corp.(a) Spray coating equipment 4,400 192,225
Brown & Sharpe Manufacturing(a) Metrology instruments 19,600 235,200
----------
427,425
----------
TOTAL PRODUCER DURABLES 594,025
TECHNOLOGY - 15.7%
CONTRACT MANUFACTURING - 1.9%
Smartflex Systems, Inc.(a) Flexible circuit assembler 20,600 142,911
ELECTRONIC COMPONENTS - 7.1%
Komag, Inc.(a) Computer components 30,900 165,122
MEMC Electronic Materials, Inc.(a) Produces silicon wafers 9,400 97,525
Unit Instruments, Inc.(a) Gas flow controllers 33,100 291,694
----------
554,341
OTHER TECHNOLOGY - 6.7%
GENICOM Corp.(a) Computer support services 32,200 148,925
Imation Corp.(a) Data storage products 14,700 243,469
PSC Inc.(a) Bar coding equipment 14,400 130,500
----------
522,894
----------
TOTAL TECHNOLOGY 1,220,146
OTHER - 2.9%
SPACEHAB, Inc.(a) Lab & supply modules 19,300 223,156
----------
TOTAL COMMON STOCKS - 94.6%
(Cost $7,843,070) 7,347,350
</TABLE>
8 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Market
Value
----------
<S> <C>
MONEY MARKET INSTRUMENTS(b)
Yield 5.27%
due September 1998 to February 1999
General Mills, Inc. $ 193,956
Johnson Controls, Inc. 300,200
----------
TOTAL MONEY MARKET INSTRUMENTS - 6.4%
(Cost: $494,156) 494,156
----------
TOTAL INVESTMENTS - 101.0%
(Cost $8,337,226) 7,841,506
OTHER LIABILITIES LESS ASSETS - (1.0%) (77,148)
NET ASSETS - 100.0% $7,764,358
----------
----------
</TABLE>
(a) Non-income producing security.
(b) Variable rate securities. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on June 30, 1998.
Based on cost of investments for federal income tax purposes of $8,337,226 on
June 30, 1998, net unrealized depreciation was ($495,720), consisting of gross
unrealized appreciation of $592,439 and gross unrealized depreciation of
($1,088,159).
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1998 9
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments, at value (Cost: $8,337,226) $7,841,506
Receivable for:
Dividends and Interest $ 4,980
Shares sold 300
Due from Advisor 233 5,513
--------
Organization costs, net of accumulated
amortization of $5,394 41,886
----------
Total assets 7,888,905
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 62,925
Shares redeemed 4,880
Comprehensive management fee 9,462
Organization costs 47,280 124,547
-------- ----------
Net assets applicable to shares
outstanding $7,764,358
----------
----------
Shares outstanding--no par value
(unlimited number of shares authorized) 776,403
----------
----------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 10.00
----------
----------
ANALYSIS OF NET ASSETS
Paid-in capital $7,949,399
Undistributed net realized gain on sales of
investments 346,178
Unrealized depreciation of investments (495,720)
Accumulated net investment loss (35,499)
----------
Net assets applicable to shares outstanding $7,764,358
----------
----------
</TABLE>
See accompanying notes to financial statements.
10 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
STATEMENT OF OPERATIONS Six Months Ended June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Interest income
Dividends $ 7,692
Interest 15,032
---------
Total investment income 22,724
Expenses:
Comprehensive management fee 49,905
Fees to unaffiliated trustees 6,020
Amortization of organization costs 4,956
---------
Total expenses 60,881
---------
Expense reimbursement by advisor (2,658)
Net investment loss (35,499)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 346,178
Net change in unrealized appreciation (506,890)
---------
Net realized and unrealized gain on investments (160,712)
---------
Net decrease in net assets resulting from operations $(196,211)
---------
---------
</TABLE>
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1998 11
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months For the Period
Ended 6/30/98 12/15/97(a) -
(unaudited) 12/31/97
------------- --------------
<S> <C> <C>
From operations:
Net investment loss $ (35,499) $ (544)
Net realized gain on sales of
investments 346,178 --
Net change in unrealized appreciation (506,890) 11,170
---------- ----------
Net (decrease) increase in net assets
resulting from operations (196,211) 10,626
From share transactions:
Proceeds from shares sold 3,569,001 4,743,861
Payments for shares redeemed (360,949) (1,970)
---------- ----------
Net increase in net assets resulting
from share transactions 3,208,052 4,741,891
---------- ----------
Total increase in net assets 3,011,841 4,752,517
Net assets at beginning of period 4,752,517 --
---------- ----------
Net assets at end of period $7,764,358 $4,752,517
---------- ----------
---------- ----------
</TABLE>
(a) Commencement of operations.
See accompanying notes to financial statements.
12 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months For the Period
Ended 6/30/98 12/15/97(a) -
(unaudited) 12/31/97
------------- --------------
<S> <C> <C>
Net asset value at beginning of period $ 10.00 $ 10.00
------- -------
Income from investment operations
Net investment loss (0.05) 0.00
Net realized and unrealized gain on
investments 0.05 0.00
------- -------
Total from investment operations 0.00 0.00
------- -------
Net asset value at end of period $ 10.00 $ 10.00
------- -------
------- -------
Total Return 0.00%(d) 0.00%(b)
Ratios/Supplemental data
Ratio of expenses to average net assets:
Before expense reimbursement 1.83%(c) 1.71%(c)
After expense reimbursement 1.75%(c) 1.71%(c)
Ratio of net investment loss to average
net assets:
Before expense reimbursement (1.15%)(c) (0.29%)(c)
After expense reimbursement (1.07%)(c) (0.29%)(c)
Portfolio turnover rate 53%(c) 0%(c)
Net assets, end of period (in thousands) $ 7,764 $ 4,753
------- -------
------- -------
</TABLE>
Average commission rate paid on stock transactions for the six months ended
June 30, 1998 was $0.0507 per share. Average commission rate paid on stock
transactions for the period December 15, 1997 to December 31, 1997 was $0.0514
per share.
(a) Commencement of operations.
(b) For the period December 15, 1997 to December 31, 1997.
(c) Ratios have been determined on an annualized basis.
(d) For the six months ended June 30, 1998.
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1998 13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Skyline Funds is an open-ended, diversified investment management company which
consists of Special Equities Portfolio, Small Cap Value Plus, 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 (formerly
Special Equities II) on February 9, 1993, and Small Cap Contrarian on December
15, 1997. The following notes relate solely to the accompanying financial
statements of Small Cap Contrarian ("Fund").
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of a market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
- - SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of premium and discount on money
market instruments. Realized gains and losses from security transactions are
reported on an identified cost basis.
- - FUND SHARE VALUATION - Fund shares are sold and redeemed on a continuous
basis at net asset value. Net asset value per share is determined as of the
close of regular session trading on the New York Stock Exchange (normally 3:00
p.m. Central time), each day the Exchange is open for trading. The net asset
value per share is determined by dividing the value of all securities and other
assets, less liabilities, by the number of shares of the Fund outstanding.
- - FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund's policy to comply with the special provisions of the Internal Revenue
Code available to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income. Such provisions were complied
with and, therefore, no federal income taxes have been accrued.
- - EXPENSES - Expenses arising in connection with a Fund are allocated to that
Fund. Other Skyline Funds' expenses, such as trustees' fees, are allocated among
the three Skyline Funds.
14 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
- --------------------------------------------------------------------------------
2
TRANSACTIONS WITH AFFILIATES
The Fund's Investment Adviser is Skyline Asset Management, L.P. ("Adviser"). For
the Adviser's management and advisory services and the assumption of most of the
Fund's ordinary operating expenses, the Fund pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total comprehensive management
fee charged for the six months ended June 30, 1998 was $49,905. The Adviser has
agreed to reimburse the Fund to the extent that the aggregate annual expenses of
the Fund, including the advisory fee and fees to unaffiliated trustees, but
excluding extraordinary costs or expenses such as legal, accounting, or other
costs or expenses not incurred in the normal course of the Fund's ongoing
operations, exceed 1.75% of the average daily net assets of the Fund.
Certain officers and trustees of the Skyline Funds are also officers, limited
partners or shareholders of limited partners of the Adviser. The Fund makes no
direct payments to the officers or trustees who are affiliated with the Adviser.
For the six months ended June 30, 1998, the Fund paid fees of $6,020 to its
unaffiliated trustees.
In connection with the organization of the Fund, organizational costs of $47,280
were advanced to the Fund by the Adviser. This expense is being amortized on a
straight line basis through December 15, 2002. The Fund will reimburse the
Adviser for such expenses in equal installments without interest over 20
calendar quarters.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
Six Months Ended For the Period
6/30/98 12/15/97 to 12/31/97
----------------------------------------
<S> <C> <C>
Shares sold 335,160 475,238
Less shares redeemed (33,795) (200)
------- -------
Net increase in shares outstanding 301,365 475,038
------- -------
------- -------
</TABLE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the six
months ended June 30, 1998, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost of purchases $4,899,704
Proceeds from sales 1,645,461
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1998 15
<PAGE>
REPORT FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
This report, including the unaudited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
16 SEMI-ANNUAL REPORT - JUNE 30, 1998
<PAGE>
FOR 24-HOUR AUTOMATED ACCESS TO YOUR 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.
- --------------------------------------------------------------------------------
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SKYLINE FUNDS
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
