<PAGE>
[LOGO]
SKYLINE SPECIAL EQUITIES PORTFOLIO
INVESTING IN SMALL-SIZED COMPANIES
STRATEGY
- - Value orientation - low price/earnings ratio- 20% plus discount to the market
- - Attention to growth - forecasted EPS growth in the 10% to 20% range
- - Focus on "neglected" companies - limited Wall Street research coverage
- - Market cap range of $100 million to $700 million
DECEMBER 31, 1997
<PAGE>
LETTER FROM WILLIAM M. DUTTON, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
January 31, 1998
Dear Shareholder:
The 1997 return for the Fund showed a gain of 35.43%, far exceeding the 22.36%
gain registered by the Russell 2000 Index. For the fourth quarter of 1997, the
Fund showed a loss of 4.19%, slightly more than the 3.35% loss experienced by
the Russell 2000 Index. The net asset value closed the year at $21.66 per share,
following a distribution of $2.89 per share in mid-December. The distribution
consisted of $1.05 per share of long-term capital gain and $1.84 per share of
short-term capital gain. The excellent performance for the year was due to good
stock selection, favorable sector weightings, an investment style that was in
vogue, and a strong economy that enabled many companies to report improved
earnings.
MARKET REVIEW
The big news of the fourth quarter was the financial crisis in Asia, highlighted
by weak currencies and falling overseas stock markets. The United States stock
market declined sharply in October and spent the remainder of the quarter
attempting to recover those losses. Large cap stocks, as measured by the S&P 500
Index, managed to recoup all of their losses and finish with a gain for the
quarter. Unfortunately, small cap stocks, as measured by the Russell 2000 Index,
showed only a marginal gain from the October lows and finished the quarter in
negative territory. In times of perceived financial crisis, such as the Asian
situation today, a dichotomy in performance often occurs because investors
typically feel more comfortable owning large blue chip stocks. Once the crisis
atmosphere dissipates, small cap stocks generally show improved performance.
The Asian crisis also had an impact on sector performance in the fourth quarter.
Noncyclical stocks were strong and cyclical stocks were weak due to the
perception that the Asian crisis would slow economic growth around the world and
negatively impact the earnings of U.S. companies. Also, long-term interest rates
declined due to the belief that the Asian crisis would have a deflationary
effect on the economy. Utilities and financial stocks, beneficiaries of
declining interest rates and investors' interest in noncyclical stocks, were the
standouts for the quarter.
Small cap stocks underperformed large cap stocks for the fourth consecutive
year, as the S&P 500 gained 33.38% compared to the 22.36% gain for the Russell
2000 Index. This result was surprising since small cap stocks seemed to have
several advantages during 1997, including attractive relative valuation,
superior earnings growth since mid-year, less exposure to weak Asian economies,
and less negative impact from the strong U.S. dollar. However, these advantages
apparently were not enough to compensate for investors' preference for "safe"
blue chip stocks.
ANNUAL REPORT - DECEMBER 31, 1997 1
<PAGE>
In terms of investment styles, small cap value investing did much better than
small cap growth investing in 1997. Small cap value did well partly due to the
strength in the U.S. economy and its positive impact on those industries in
which small cap managers tend to invest. Also, financial stocks, a favorite area
for value managers, were among the best performing in the market. Growth stock
managers, on the other hand, were hurt by their preference for technology and
health care stocks, which did quite poorly for the year. Also, we believe that
price/earnings multiple compression hurt the returns of many high multiple
growth stocks.
PORTFOLIO REVIEW
The Fund showed a loss of 4.19% for the fourth quarter. The Fund was hurt by its
exposure to economically sensitive stocks, which did poorly due to investors'
preference for noncyclical issues. Also, a number of stocks showed
larger-than-normal declines due to either fundamental problems or price setbacks
following big advances earlier in the year. In most cases we believe these
stocks will recover and show their full value in the future. The financial
services sector of the Fund was a notable underperformer for the period, showing
a loss for the quarter while financial stocks in the Russell 2000 Index did well
overall. These negatives were partially offset by generally good stock selection
in most sectors of the Fund.
For the year, the Fund showed a gain of 35.43% compared to a gain of 22.36% for
the Russell 2000 Index. The primary reason for the strong year was good stock
selection, as the Fund had numerous large gainers and relatively few large
losers. Winning stocks came from many different industries and usually resulted
from individual companies performing well fundamentally. Stock selection was
helped by a favorable economy that allowed many companies to report improved
earnings. In terms of sector weightings, the Fund benefited from low weightings
in technology and health care stocks, two of the weakest performing sectors in
the market. However, through most of the year, the Fund was modestly
underweighted in financial stocks, one of the strongest sectors of the year.
Two themes stand out as being most important today. First, the Fund has a large
weighting in economically sensitive stocks and will benefit most from strength
in the consumer and industrial parts of the economy. Second, a large part of the
Fund is invested in restructuring situations, companies that have hired new CEOs
to improve profitability. These situations are less dependent on the economy and
more dependent on company specific initiatives.
2 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
OUTLOOK
We are cautiously optimistic about prospects for the Fund over the next year.
Small cap stocks as a group are trading at very attractive valuation levels
compared to large cap stocks. At the same time, fundamentals seem to favor small
cap stocks since the domestic economy is strong and they are not as affected by
the international problems that currently impact large multinational companies.
Our enthusiasm is restrained only because overall stock market valuations are
high and economic conditions seem as if they cannot get much better. It is at
times like this that stocks often peak. Regardless of near-term market
movements, however, we believe that our small cap value-oriented approach will
yield good returns to investors over the long term.
/s/ William M. Dutton
CHANGE IN VALUE OF A $10,000 INVESTMENT(1)
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT SINCE INCEPTION
[CHART]
Special Equities Russell 2000 S&P 500
4/23/87 10,000 10,000 10,000
1987 8,314 7,567 8,794
1988 10,787 9,449 10,247
1989 13,377 10,986 13,469
1990 12,135 8,843 13,037
1991 17,885 12,914 17,018
1992 25,470 15,294 18,325
1993 31,289 18,184 20,158
1994 30,929 17,582 20,424
1995 35,206 22,932 28,087
1996 45,897 26,715 34,617
1997 62,161 32,663 46,172
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at the end of this section.
ANNUAL REPORT - DECEMBER 31, 1997 3
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q
1997 1997 3 yrs.
<S> <C> <C> <C>
SPECIAL EQUITIES -4.19 35.43 26.20
RUSSELL 2000 -3.35 22.36 22.33
S&P 500 2.84 33.38 31.24
<CAPTION>
Calendar Years
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
SPECIAL EQUITIES 35.4 30.4 13.8 -1.2 22.9
RUSSELL 2000 22.4 16.5 28.4 -1.8 18.9
S&P 500 33.4 23.3 37.5 1.3 10.0
</TABLE>
SECTOR WEIGHTINGS (as of December 31, 1997)
- --------------------------------------------------------------------------------
[CHART]
<TABLE>
<S> <C>
Autos & Transportation 11.5%
Cash 5.4%
Technology 3.5%
Producer Durables 11.5%
Materials & Processing 13.3%
Health Care 4.2%
Financial Services 15.2%
Energy 4.1%
Consumer Discretionary 29.7%
Consumer Staples 1.6%
</TABLE>
4 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
5 yrs. 10 yrs. Inception(2)
<S> <C> <C> <C>
SPECIAL EQUITIES 19.54 22.28 18.63
RUSSELL 2000 16.41 15.76 11.71
S&P 500 20.30 18.04 15.38
</TABLE>
<TABLE>
<CAPTION>
Calendar Years
1992 1991 1990 1989 1988 1987(2)
<S> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES 42.5 47.4 -9.3 24.0 29.7 -16.9
RUSSELL 2000 18.4 46.1 -19.5 16.2 24.9 -24.3
S&P 500 7.7 30.6 -3.2 31.4 16.5 -12.0
</TABLE>
SECTOR PERFORMANCE (as of December 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q 1997 1997
------------------ ------------------
SPECIAL RUSSELL SPECIAL RUSSELL
EQUITIES 2000 EQUITIES 2000
<S> <C> <C> <C> <C>
CONSUMER STAPLES 20.5% 3.9% -15.0% 40.1%
-------------------------------------------------
OTHER 0.0 2.0 0.0 33.2
-------------------------------------------------
UTILITIES 0.0 13.7 23.7 35.6
-------------------------------------------------
HEALTH CARE -0.9 -7.2 24.5 10.3
-------------------------------------------------
FINANCIAL SERVICES -1.5 5.8 45.6 36.0
-------------------------------------------------
PRODUCER DURABLES -3.2 -9.4 58.5 26.3
-------------------------------------------------
TECHNOLOGY -4.4 -16.0 51.7 1.3
-------------------------------------------------
CONSUMER DISCRETIONARY -4.7 -3.3 37.5 21.4
-------------------------------------------------
MATERIALS & PROCESSING -6.3 -7.3 41.1 13.1
-------------------------------------------------
AUTOS & TRANSPORTATION -10.4 -3.1 8.3 31.3
-------------------------------------------------
ENERGY -11.3 -16.0 31.4 14.4
-------------------------------------------------
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 5
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL
EQUITIES RUSSELL 2000 S&P 500
<S> <C> <C> <C>
P/E RATIO (MEDIAN) 17.1 21.9 21.6
PRICE/BOOK 2.36 2.85 4.11
PRICE/SALES 0.81 1.47 1.77
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 15.4% 21.4% 12.6%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $410 million $750 million $34 billion
PORTFOLIO VALUE $467 million $873 billion $7,536 billion
NUMBER OF HOLDINGS 84 1,894 500
- --------------------------------------------------------------------------------
TICKER SYMBOL: SKSEX
CUSIP #: 830833208
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</TABLE>
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
INTERNATIONAL MULTIFOODS CORP. (IMC)
International Multifoods operates food manufacturing and foodservice
distribution businesses in the United States, Canada, and Venezuela. IMC is
experiencing a dramatic improvement in profitability as a result of steps taken
by the company's new CEO, Gary Costley. Costley was previously the president of
Kellogg Company's North America division, which has over $4 billion in revenues.
IMC is expected to continue to show rapid earnings growth through margin
enhancement driven by the reduction of overhead, elimination of unprofitable
product lines, and better asset utilization. IMC is inexpensive relative to its
$130 per share in sales and earnings power of $3.00 per share.
MAGNETEK, INC. (MAG)
MagneTek is a manufacturer of magnetic and electrical products, including
lighting ballasts, electric motors, generators, and power supplies. MAG is
currently in the early stages of a turnaround in its operations led by Ronald
Hoge, who was named president and CEO of MAG in July 1996. Prior to joining MAG,
Hoge was president of the Aerospace Equipment Systems Division of AlliedSignal,
Inc., which has over $2 billion in revenues. Hoge brings a bottom-line focus and
strong operating management skills to a firm that historically was operated with
the goal of growing the top line. Earnings are expected to grow rapidly over the
next several years as management improves margins from their currently depressed
levels by consolidating operations, reducing overhead, and moving manufacturing
to low-cost locations. At current price levels, MAG is inexpensive relative to
its earnings power of over $2.50 per share.
6 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS(3) % OF NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
FURON COMPANY
Polymer-based products 2.1%
DELPHI FINANCIAL GROUP, INC.
Accident & health insurance 2.0%
ALLIED GROUP, INC.
Personal lines insurance 1.8%
MAGNETEK, INC.
Integrated electrical products 1.7%
IHOP CORP.
Restaurant operator 1.7%
INTERPOOL, INC.
Container leasing firm 1.7%
FINGERHUT COMPANIES, INC.
Catalog retailer 1.6%
UNITED STATIONERS INC.
Office products distributor 1.6%
ONEIDA LTD.
Tableware/flatware 1.6%
FREMONT GENERAL CORP.
Workers' compensation insurance 1.5%
TOP TEN HOLDINGS 17.3%
</TABLE>
NOTES TO PERFORMANCE
(1) The performance for the one, three, five, and ten years ended December 31,
1997, and for the period April 23, 1987 (inception) through December 31,
1997, is an average annual total return calculation which is described in
the Fund's prospectus. Of course, past performance is no guarantee of
future results. The principal value and return on your investment will
fluctuate and on redemption may be worth more or less than your original
cost.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. The S&P 500 Index, a widely quoted
stock market index, includes 500 of the largest companies publicly traded
in America. All figures take into account reinvested dividends. All indexes
and Fund characteristics are compiled by Frank Russell Company.
Special Equities Portfolio closed to new investors on January 30, 1997.
Source: Frank Russell Company.
(2) Return is calculated from the Fund's inception on April 23, 1987.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor Inc.
ANNUAL REPORT - DECEMBER 31, 1997 7
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 10.4%
AUTO RELATED - 3.4%
APS Holding Corp. (a) Aftermarket auto parts dist. 39,000 $ 97,500
Delco Remy International, Inc.(a) Starters & alternators 337,600 4,220,000
Excel Industries, Inc. OEM auto parts supplier 243,600 4,400,025
Intermet Corp. Metal castings 397,800 6,961,500
-----------
15,679,025
OTHER TRANSPORTATION - 5.6%
Interpool, Inc. Container leasing firm 523,500 7,754,343
Kitty Hawk, Inc.(a) Air freight services 287,000 5,524,750
Monaco Coach Corp.(a) RV producer 174,200 4,442,100
Pittston Burlington Group Air freight services 218,500 5,735,625
Trailer Bridge, Inc.(a) Marine transportation 316,800 2,811,600
-----------
26,268,418
TRUCKING - 1.4%
Landstar System, Inc.(a) Truckload carrier 246,300 6,496,162
-----------
TOTAL AUTOS & TRANSPORTATION 48,443,605
CONSUMER DISCRETIONARY - 29.7%
APPAREL/TEXTILES - 1.0%
Kellwood Co. Apparel maker 156,500 4,695,000
COMMERCIAL SERVICES - 6.1%
Bell & Howell Co.(a) Info services/mailing eqpt. 196,200 4,745,588
Borg-Warner Security Corp. Alarm/guard services 344,800 6,077,100
Harland (John H.) Co. Check printing 217,200 4,561,200
New England Business
Service, Inc. Business forms firm 174,300 5,882,625
United Stationers Inc.(a) Office products distributor 154,800 7,449,750
-----------
28,716,263
CONSUMER PRODUCTS/SERVICES - 7.5%
Carmike Cinemas, Inc.(a) Cinema operator 156,000 4,475,250
Furniture Brands Intl, Inc.(a) Furniture manufacturer 322,700 6,615,350
Gibson Greetings, Inc.(a) Greeting cards 227,400 4,974,375
Harman Intl. Industries, Inc. Audio equipment 112,100 4,757,244
Libbey Inc. Glass tableware 180,200 6,825,075
Oneida Ltd. Tableware/flatware 271,500 7,245,656
-----------
34,892,950
PRINTING/PUBLISHING - 1.9%
Cadmus Communications Corp. Commercial printer 82,900 1,699,450
World Color Press, Inc.(a) Commercial printer 270,200 7,177,187
-----------
8,876,637
</TABLE>
8 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
RESTAURANTS - 4.8%
IHOP Corp.(a) Restaurant operator 242,300 $ 7,874,750
O'Charley's Inc.(a) Casual dining 214,900 3,760,750
Ryan's Family Steak
Houses, Inc.(a) Casual dining 605,000 5,180,313
Sonic Corp.(a) Fast-food restaurants 195,800 5,506,875
-----------
22,322,688
RETAIL - 8.4%
Charming Shoppes, Inc.(a) Women's apparel 864,100 4,050,469
Discount Auto Parts, Inc.(a) Auto parts stores 277,600 5,309,100
Fabri-Centers of America, Inc.(a) Fabric/craft stores 135,000 3,012,187
Fingerhut Companies, Inc. Catalog retailer 349,700 7,474,836
Finlay Enterprises, Inc.(a) Leased jewelry departments 197,600 4,495,400
Heilig-Meyers Co. Furniture store operator 455,400 5,464,800
Tractor Supply Co.(a) Farm-related products 303,300 4,473,675
Zale Corp.(a) Jewelry retailer 221,500 5,094,500
-----------
39,374,967
-----------
TOTAL CONSUMER DISCRETIONARY 138,878,505
CONSUMER STAPLES - 1.6%
International Multifoods Corp. Foodservice distribution 211,000 5,973,938
ProSource, Inc.(a) Foodservice distribution 198,800 1,491,000
-----------
TOTAL CONSUMER STAPLES 7,464,938
ENERGY - 4.1%
EXPLORATION & PRODUCTION - 2.0%
Comstock Resources, Inc.(a) Oil & gas producer 437,000 5,216,688
Swift Energy Co.(a) Oil & gas producer 208,690 4,395,533
-----------
9,612,221
OTHER ENERGY - 2.1%
MarkWest Hydrocarbon, Inc.(a) Natural gas processing 252,200 5,548,400
Willbros Group Inc.(a) Engineering/construction 274,300 4,114,500
-----------
9,662,900
-----------
TOTAL ENERGY 19,275,121
FINANCIAL SERVICES - 15.2%
INSURANCE - 14.4%
Allied Group, Inc. Personal lines insurance 290,175 8,306,259
American Heritage Life
Investment Life insurance firm 199,900 7,196,400
Blanch (E.W.) Holdings, Inc. Reinsurance brokerage 185,800 6,398,488
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 9
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997 (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
Chartwell Re Corporation P & C reinsurance 135,200 $ 4,563,000
Delphi Financial Group, Inc. Accident & health insurance 204,606 9,207,270
Financial Security Assurance
Holdings Municipal bond insurance 129,800 6,262,850
Fremont General Corp. Workers' comp. insurance 131,500 7,199,625
Highlands Insurance
Group, Inc.(a) P & C insurance 249,400 7,076,725
Horace Mann Educators Corp. P & C insurance 210,800 5,994,625
SCPIE Holdings Inc. Medical malpractice ins. 170,300 4,928,056
-----------
67,133,298
OTHER FINANCIAL SERVICES - 0.8%
MoneyGram Payment
Systems Inc.(a) Wire transfer services 354,700 3,813,025
-----------
TOTAL FINANCIAL SERVICES 70,946,323
HEALTH CARE - 4.2%
HEALTH CARE SERVICES - 3.1%
Sierra Health Services, Inc.(a) Health maintenance organ. 116,800 3,927,400
Trigon Healthcare, Inc.(a) Health maintenance organ. 210,700 5,504,538
United Payors & United
Providers, Inc.(a) Health care intermediary 260,200 5,008,850
-----------
14,440,788
MEDICAL EQUIPMENT/PRODUCTS - 1.1%
Marquette Medical
Systems, Inc.(a) Monitoring equipment 191,100 5,088,037
-----------
TOTAL HEALTH CARE 19,528,825
MATERIALS & PROCESSING - 13.3%
BUILDING/CONSTRUCTION PRODUCTS - 4.7%
Ameron International Corp. Concrete pipe/coatings 91,000 5,755,750
Chicago Bridge & Iron Co. Maker of steel tanks 350,500 5,695,625
Dayton Superior Corp.(a) Concrete accessories 258,400 4,263,600
Interface, Inc. Carpet producer 203,000 5,887,000
International Comfort
Products Corp.(a) Heating & cooling products 34,600 289,775
-----------
21,891,750
INDUSTRIAL PRODUCTS - 2.1%
Furon Company Polymer-based products 464,400 9,694,350
METAL FABRICATIONS - 1.5%
Citation Corp.(a) Castings manufacturer 433,900 7,050,875
</TABLE>
10 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
PACKAGING/PAPER - 2.0%
BWAY Corp.(a) Metal cans/containers 240,000 $ 5,490,000
FiberMark, Inc.(a) Fiber-based materials 173,300 3,725,950
-----------
9,215,950
SPECIALTY CHEMICALS - 2.0%
Lilly Industries, Inc. Industrial coatings/chemicals 212,300 4,378,688
Synthetic Industries, Inc.(a) Industrial fibers 211,500 5,234,625
-----------
9,613,313
STEEL/IRON - 1.0%
Birmingham Steel Corp. Steel mini-mill 297,700 4,688,776
-----------
TOTAL MATERIALS & PROCESSING 62,155,014
PRODUCER DURABLES - 11.5%
MACHINERY - 4.7%
Alamo Group, Inc. Grounds maintenance eqpt. 107,300 2,327,069
Applied Industrial
Technologies Industrial prods. distributor 242,250 6,480,187
Binks-Sames Corp. Spray coating equip 103,600 4,377,100
Brown & Sharpe Mfg. Co.(a) Metrology instruments 330,800 3,370,025
DT Industries, Inc. Packaging equipment 161,400 5,487,600
-----------
22,041,981
OTHER PRODUCER DURABLES - 6.8%
General Cable Corp. Wire & cable producer 197,200 7,136,175
LSI Industries Inc. Lighting/graphics products 217,800 3,974,850
MagneTek, Inc.(a) Integrated electrical prods. 415,600 8,104,200
Tokheim Corp.(a) Gas station pumps/eqpt. 270,800 5,602,175
TriMas Corp. Diversified manufacturer 197,000 6,771,875
-----------
31,589,275
-----------
TOTAL PRODUCER DURABLES 53,631,256
TECHNOLOGY - 3.5%
BancTec Inc.(a) Financial software/eqpt. 262,600 7,040,963
GENICOM Corp.(a) Computer support services 330,900 3,805,350
Microsemi Corp.(a) Semiconductor producer 251,200 4,411,700
PSC Inc.(a) Bar coding equipment 70,800 933,675
-----------
TOTAL TECHNOLOGY 16,191,688
-----------
TOTAL COMMON STOCKS - 93.5%
(Cost: $364,712,039) 436,515,275
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 11
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997 (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
CONVERTIBLE BOND
AUTOS & TRANSPORTATION - 1.1%
Atlantic Coast Airlines, Inc.(b)
7.0%, Due 7/1/04 Regional airline $2,935,000 $ 5,139,919
-----------
TOTAL CONVERTIBLE BOND
(Cost: $2,935,428) 5,139,919
MONEY MARKET INSTRUMENTSC
Yield 5.32% to 5.64%
due January 1998 to September 1998
American Family Financial Services 486,000
General Mills, Inc. 1,340,964
Johnson Controls, Inc. 16,614,439
Pitney Bowes Credit Corp. 3,598,909
Sara Lee Corp. 32,638
Warner Lambert Corp. 1,246,622
-----------
TOTAL MONEY MARKET INSTRUMENTS - 5.0%
(Cost: $23,319,572) 23,319,572
-----------
TOTAL INVESTMENTS - 99.6%
(Cost: $390,967,039) 464,974,766
OTHER ASSETS LESS LIABILITIES - 0.4% 2,094,924
-----------
NET ASSETS - 100.0% $467,069,690
------------
------------
</TABLE>
(a) Non-income producing security.
(b) The following security may require registration under the Securities Act of
1933 or an exemption therefrom in order to effect sale in the ordinary course of
business. This security is valued at fair market supplied by a pricing source or
brokers. If not available, then the security value is determined in good faith
by the Skyline Funds' Board of Trustees. At December 31, 1997, the aggregate
value of the Fund's restricted security was $5,139,919, which represented 1.1%
of net assets.
<TABLE>
<CAPTION>
Security Description Date of Acquisition Principal Amount Unit cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Atlantic Coast Airlines, Inc. 6/27/97 $2,935,000 $100.01
7.00%, Due 2004
- --------------------------------------------------------------------------------
</TABLE>
(c) Variable rate securities. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on December 31, 1997.
Based on cost of investments for federal income tax purposes of $390,967,039 on
December 31, 1997, net unrealized appreciation was $74,007,727, consisting of
gross unrealized appreciation of $86,920,370 and gross unrealized depreciation
of $12,912,643.
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $390,967,039) $ 464,974,766
Receivable for:
Securities sold $ 751,024
Dividends and interest 326,501
Shares sold 2,384,158 3,461,683
----------- -------------
Total assets 468,436,449
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 517,726
Shares redeemed 271,550
Comprehensive management fee 564,293
Trustees' fee 489
Other liabilities 12,701 1,366,759
----------- -------------
Net assets applicable to shares outstanding $ 467,069,690
-------------
-------------
Shares outstanding--no par value
(unlimited number of shares authorized) 21,567,101
-------------
-------------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 21.66
-------------
-------------
ANALYSIS OF NET ASSETS
Paid-in capital $ 390,433,509
Undistributed net realized gain on
sales of investments 2,628,454
Unrealized appreciation of investments 74,007,727
-------------
Net assets applicable to shares outstanding $ 467,069,690
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 13
<PAGE>
STATEMENT OF OPERATIONS Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 2,398,966
Interest 1,366,545
-------------
Total investment income 3,765,511
Expenses:
Comprehensive management fee 5,196,131
Fees to unaffiliated trustees 20,643
-------------
Total expenses 5,216,774
-------------
Net investment loss (1,451,263)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 54,539,741
Net change in unrealized appreciation 45,751,321
-------------
Net realized and unrealized gain on investments 100,291,062
-------------
Net increase in net assets resulting from operations $ 98,839,799
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
14 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/97 12/31/96
------------- -------------
<S> <C> <C>
From operations:
Net investment loss $ (1,451,263) $ (537,572)
Net realized gain on sales of
investments 54,539,741 36,985,981
Net change in unrealized appreciation 45,751,321 8,160,180
------------- -------------
Net increase in net assets resulting
from operations 98,839,799 44,608,589
Distributions to shareholders from
net realized gains (54,133,704) (33,540,295)
From share transactions:
Proceeds from shares sold 210,895,971 68,600,112
Reinvestment of capital gain
distributions 52,981,301 32,987,339
Payments for shares redeemed (60,994,053) (60,788,388)
Redemption in-kind - (7,286,453)
------------- -------------
Net increase in net assets resulting
from share transactions 202,883,219 33,512,610
------------- -------------
Total increase in net assets 247,589,314 44,580,904
Net assets at beginning of year 219,480,376 174,899,472
------------- -------------
Net assets at end of year $ 467,069,690 $ 219,480,376
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 15
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of year $ 18.16 $ 16.79 $ 15.64 $ 17.83 $ 17.12
-------- -------- -------- -------- --------
Income from Investment
Operations
Net investment loss (0.07) (0.04) (0.06) (0.08) (0.09)
Net realized and unrealized
gain (loss) on investments 6.46 5.02 2.21 (0.18) 3.94
-------- -------- -------- -------- --------
Total from Investment
Operations 6.39 4.98 2.15 (0.26) 3.85
-------- -------- -------- -------- --------
Less distributions from net
realized gains on investments (2.89) (3.61) (1.00) (1.93) (3.14)
-------- -------- -------- -------- --------
Net asset value at end of year $ 21.66 $ 18.16 $ 16.79 $ 15.64 $ 17.83
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return 35.43% 30.37% 13.83% (1.15%) 22.85%
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.48% 1.51% 1.51% 1.49% 1.48%
Ratio of net investment
loss to average net
assets (0.41%) (0.32%) (0.35%) (0.49%) (0.54%)
Portfolio turnover rate 62% 130% 71% 82% 104%
Net assets, end of year
(in thousands) $467,070 $219,480 $174,899 $202,771 $228,011
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Average commission rate paid on stock transactions for the year ended December
31, 1997 and December 31, 1996 was $0.0601 and $0.0636 per share, respectively.
Effective August 31, 1995, the Fund's Investment Adviser changed from Mesirow
Asset Management, Inc., to Skyline Asset Management, L.P.
Note: Total return does not reflect the effect of any sales charges which may
have been previously charged.
See accompanying notes to financial statements.
16 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Skyline Funds is an open-ended, diversified investment management company which
consists of Special Equities Portfolio, Special Equities II, and Small Cap
Contrarian. The Funds commenced public offering of their shares as follows:
Special Equities Portfolio on April 23, 1987, Special Equities II on February 9,
1993, and Small Cap Contrarian on December 15, 1997. The following notes relate
solely to the accompanying financial statements of Special Equities Portfolio
("Fund"). Skyline Special Equities Portfolio closed to new investors on January
30, 1997.
1
SIGNIFICANT ACCOUNTING POLICIES
/ / SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
/ / SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of premium and discount on money
market instruments. Realized gains and losses from security transactions are
reported on an identified cost basis.
/ / FUND SHARE VALUATION - Fund shares are sold and redeemed on a continuous
basis at net asset value. Net asset value per share is determined as of the
close of regular session trading on the New York Stock Exchange (normally 3:00
p.m. Central time), each day the Exchange is open for trading. The net asset
value per share is determined by dividing the value of all securities and other
assets, less liabilities, by the number of shares of the Fund outstanding.
/ / FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund's policy to comply with the special provisions of the Internal Revenue
Code available to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income. Such provisions were complied
with and, therefore, no federal income taxes have been accrued.
/ / EXPENSES - Expenses arising in connection with a Fund are allocated to that
Fund. Other Skyline Funds expenses, such as trustees' fees, are allocated among
the three Skyline Funds.
/ / RECLASSIFICATION - The 1997 net investment loss of $1,451,263 has been
offset against undistributed net realized gains at December 31, 1997.
ANNUAL REPORT - DECEMBER 31, 1997 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
2
TRANSACTIONS WITH AFFILIATES
The Fund's Investment Adviser is Skyline Asset Management, L.P. ("Adviser"). For
the Adviser's management and advisory services and the assumption of most of the
Fund's ordinary operating expenses, the Fund pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total comprehensive management
fee charged for the year ended December 31, 1997 was $5,196,131.
Certain officers and trustees of the Skyline Funds are also officers, limited
partners or shareholders of limited partners of the Adviser. The Fund makes no
direct payments to the officers or trustees who are affiliated with the Adviser.
For the year ended December 31, 1997, fees of $20,643 were paid by the Fund to
the unaffiliated trustees.
3
REDEMPTION IN-KIND
On September 30, 1996 the Fund transferred to a shareholder, in payment of the
proceeds of a redemption of Fund shares on that date, investments with a market
value of $6,777,575 and a cost basis of $5,691,096 and $508,878 was paid in
cash.
18 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
- --------------------------------------------------------------------------------
4
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
12/31/97 12/31/96
----------------------------
<S> <C> <C>
Shares sold 9,851,723 3,541,731
Shares issued
in reinvestment of dividends 2,483,873 1,876,407
----------------------------
12,335,596 5,418,138
Less shares redeemed (2,855,781) (3,385,587)
Less shares redeemed in-kind - (363,595)
----------------------------
Net increase in shares outstanding 9,479,815 1,668,956
----------------------------
----------------------------
</TABLE>
5
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1997, are as follows:
<TABLE>
<S> <C>
Cost of purchases $342,898,547
Proceeds from sales 206,015,483
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders of Skyline Special Equities Portfolio
and the Board of Trustees of Skyline Funds
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Special Equities Portfolio as of
December 31, 1997, the related statements of operations for the year then ended
and changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Skyline Special Equities Portfolio at December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 16, 1998
20 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FEDERAL TAX STATUS OF 1997 DIVIDENDS
- --------------------------------------------------------------------------------
Capital gain dividends paid to you, whether received in cash or reinvested in
shares, must be included in your federal income tax return and must be reported
by the Fund to the Internal Revenue Service in accordance with U.S. Treasury
Department regulations. Short-term capital gain dividends paid to you are
taxable as ordinary income. Long-term capital gain dividends paid to you are
taxable as long-term capital gain income regardless of how long you have held
Fund shares.
REPORT FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
This report, including the audited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund. The
report is not authorized for distribution to prospective investors in the Fund
unless it is accompanied or preceded by a currently effective prospectus of the
Fund.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
ANNUAL REPORT - DECEMBER 31, 1997 21
<PAGE>
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22 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
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ANNUAL REPORT - DECEMBER 31, 1997 23
<PAGE>
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24 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FOR 24-HOUR SKYLINE FUNDS PRICES CALL: 1.800.828.2SKY
(1.800.828.2759)
TO SPEAK WITH A SKYLINE FUNDS REPRESENTATIVE
DURING NORMAL BUSINESS HOURS CALL: 1.800.458.5222
- --------------------------------------------------------------------------------
[LOGO]
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
<PAGE>
[LOGO]
SKYLINE FUNDS
FOR 24-HOUR SKYLINE FUNDS PRICES CALL: 1.800.828.2SKY
(1.800.828.2759)
TO SPEAK WITH A SKYLINE FUNDS REPRESENTATIVE
DURING NORMAL BUSINESS HOURS CALL: 1.800.458.5222
[PICTURE]
SKYLINE SPECIAL EQUITIES II
INVESTING IN SMALL-SIZED COMPANIES
STRATEGY
- Value orientation - low price/earnings
ratio - 20% plus discount to the market
- Attention to growth - forecasted EPS
growth generally more than 15%
- Focus on "neglected" companies - limited
Wall Street research coverage
- Market cap range of $400 million to $2
billion
[LOGO]
SKYLINE FUNDS
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
DECEMBER 31, 1997
<PAGE>
LETTER FROM KENNETH S. KAILIN, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
January 31, 1998
Dear Shareholder:
We are pleased to report that, for the year ended December 31, 1997, the Fund
rose 26.21%. This marks the third consecutive year of annual returns in excess
of 20% for the Fund. The Fund's 1997 return compares favorably to our primary
benchmark, the Russell 2000 Index, which rose 22.36% in 1997. The Fund also
performed well relative to the average small stock mutual fund which returned
20.75% in 1997 and the average stock mutual fund which returned 24.36%,
according to Lipper Analytical Services, Inc. The net asset value closed the
year at $12.75 per share, following a distribution of $2.29 per share in mid-
December. The distribution consisted of $1.04 per share of long-term capital
gain and $1.25 per share of short-term capital gain.
The final three months of 1997 were generally weaker periods for smaller stocks
due to Asian-related fears, worries over slowing corporate profit growth, and
seasonal profit taking. The Fund was not immune to these forces and dropped
modestly during this period. For the quarter ending December 31, 1997, the Fund
declined 3.40%. The Russell 2000 Index recorded a similar decline of 3.35%. The
average small stock mutual fund fell 4.97% in the quarter, according to Lipper
Analytical Services, Inc.
MARKET REVIEW
The backdrop for the stock market in 1997 was almost perfect. The economy was
strong with solid GDP growth, low unemployment, and high consumer confidence.
Normally, inflation and interest rates rise in this type of situation, but this
did not occur. In fact, inflation fell as did interest rates. Economists tell us
fierce price competition due to imports and improved productivity by businesses
helped continue this "Goldilocks" economy (not too hot and not too cold). This
proved to be a great environment for business profits and thus stock market
returns.
Early in the year, large companies showed better profit growth compared with
smaller companies due mainly to overseas growth. However, beginning in the
summer, large company growth began to show signs of slowing due to foreign
currency issues. As a result, smaller stocks, which are tied more closely to the
U.S. economy, did much better than large stocks in the third quarter. During the
fourth quarter, large companies proved to be a safe haven, as concerns over the
global crisis in Asia mounted. In addition, institutional window dressing and
seasonal tax selling exerted further pressure on smaller stocks in the final
quarter. As a result of the above issues, both small stocks and large stocks
reported great absolute returns in 1997, but large company stocks performed
better.
In the small stock arena, value-oriented investors clearly outperformed growth-
oriented investors during both the year and the fourth quarter. Value buyers
tend to concentrate more heavily in economically sensitive and financially
sensitive areas, such as industrial manufacturing and insurance companies.
Strong U.S. growth helped domestic-based industrial companies, while falling
interest rates helped financial-based businesses. Growth investors, conversely,
generally focus on fast-paced technology and health care stocks. These areas
were volatile during the year and faced the challenge of severe pricing pressure
and unstable demand. As a result, the value approach largely worked better than
the growth approach in 1997.
ANNUAL REPORT - DECEMBER 31, 1997 1
<PAGE>
1997 ANNUAL REVIEW
The strong economic backdrop led to superb stock market gains in 1997. The gains
were widespread. The Russell 2000's best performing economic sectors were
consumer staples, financial services, and utilities. Each of these sectors was
up more than 30% for the year. The worst performing sector was technology, up
1% for 1997.
The Fund's results were even better, as financial services stocks and autos and
transportation stocks were up over 40% for the year. Some sectors of the Fund
performed significantly better than the corresponding benchmark sector
performance. Particularly noteworthy were autos and transportation, consumer
discretionary, health care, and technology.
A large percentage of the portfolio's holdings were in financial services and
consumer discretionary stocks throughout the course of 1997. These two sectors
provided the Fund with returns of over 30% in 1997.
FOURTH QUARTER REVIEW
As previously noted, small company stocks were generally weak in the fourth
quarter. Based on the Russell 2000 Index, the weakest areas were energy and
technology. Both sectors were down over 15%. The only four sectors reporting
positive returns were utilities, consumer staples, financial services, and
other. Utilities stocks were particularly robust, registering a gain of almost
14% in the quarter.
The Fund's negative fourth quarter return primarily related to several poor
performing sectors. Falling energy prices led to negative energy stock
performance. In addition, our technology stocks were impacted by Asian concerns,
and our consumer stock holdings were down modestly on weak holiday shopping
reports. While the Fund did not hold a large percentage of poor performing
energy or technology stocks, exposure to the weak consumer group was over 25% of
the portfolio's holdings.
The quarterly return for the Fund was essentially the same as our benchmark.
However, we strive to beat our benchmark each quarter and thus we were not
satisfied with the results. A few disappointing individual stock selections in
several industries constrained performance this quarter. In addition, the Fund
was hurt by having no exposure to utilities, the best sector in the fourth
quarter. Fortunately, sizable holdings in positive performing financial stocks
along with some strong performing new stock purchases helped the Fund
considerably.
OUTLOOK
Presently it appears that the U.S. economy may slow marginally from the 1997
pace, as pressures from Asia and recent weak consumer spending trends take hold.
However, inflation continues to be tame, and low long-term interest rates should
encourage growth. Thus, most economists predict another year of slow, but
steady, growth. This should again provide a positive environment for stock
prices. However, the U.S. stock market has put together a very unusual string of
three consecutive years of great performance, and most valuation measures
indicate the market carries more potential risk than return. Therefore, our
return expectations are generally more modest for 1998.
2 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
Large companies, as measured by the S&P 500 Index, have now outperformed small
companies, as measured by the Russell 2000 Index, for four consecutive years.
Stock prices tend to follow profit growth, and in recent years, large companies
appear to have been growing faster. While not conclusive, it appears that large
companies have been growing their profits faster than smaller companies for two
central reasons. First, large companies with sizable international exposure
benefited from strong overseas growth opportunities. Second, large companies
have done a better job of reducing costs through the use of technology,
outsourcing cost centers, and improving manufacturing processes.
Based on expectations of poor international market conditions due to weak demand
and currency problems, smaller domestic companies should have an advantage in
future periods. In addition, smaller companies are rapidly following the trends
set by larger companies by embarking on cost saving programs, which include new
technology, outsourcing, and better manufacturing processes. Thus, we believe
the fortunes of smaller companies are looking brighter than in the recent past.
Only time will tell if better relative profit growth comes to fruition for
smaller companies.
If the U.S. economy slows marginally in 1998, then investors may likely attach
more importance to profit growth. The Fund focuses on smaller companies with
above average growth prospects and below average valuations and thus would
appear to be well positioned for a slower growth environment.
/s/ illegible
CHANGE IN VALUE OF A $10,000 INVESTMENT(1)
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
Special Russell
Equities II 2000 S&P 500 S&P 400
----------- ------- ------- -------
<S> <C> <C> <C> <C>
2/9/93 10000 10000 10000 10000
1993 11008 11376 10732 11174
1994 10841 11169 10874 10774
1995 13112 14346 14953 14108
1996 16599 16712 18431 16819
1997 20950 20448 24582 22246
</TABLE>
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at the end of this section.
ANNUAL REPORT - DECEMBER 31, 1997 3
<PAGE>
PERFORMANCE (%)(1)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q Since
1997 1997 3 yrs. Inception(2)
<S> <C> <C> <C> <C>
SPECIAL EQUITIES II (3.40) 26.21 24.56 16.32
RUSSELL 2000 (3.35) 22.36 22.33 15.74
</TABLE>
SECTOR WEIGHTINGS (as of December 31, 1997)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Autos & Transportation 2.0%
Cash 5.6%
Technology 6.5%
Consumer Discretionary 28.9%
Producer Durables 12.1%
Materials & Processing 7.2%
Consumer Staples 1.6%
Energy 4.9%
Health Care 8.1%
Financial Services 23.1%
</TABLE>
4 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
Calendar Years
- --------------------------------------------------------
1997 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C>
26.2 26.6 21.0 (1.5) 10.1
22.4 16.5 28.4 (1.8) 13.8
</TABLE>
SECTOR PERFORMANCE (as of December 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q 1997 1997
------------------------ -----------------------
SPECIAL RUSSELL SPECIAL RUSSELL
EQUITIES II 2000 EQUITIES II 2000
<S> <C> <C> <C> <C>
AUTOS & TRANSPORTATION 11.6% (3.1%) 48.4% 31.3%
CONSUMER STAPLES 5.8 3.9 (4.5) 40.1
FINANCIAL SERVICES 2.7 5.8 42.1 36.0
MATERIALS & PROCESSING 1.9 (7.3) 3.5 13.1
OTHER 0.0 2.0 0.0 33.2
UTILITIES 0.0 13.7 22.4 35.6
HEALTH CARE (2.4) (7.2) 28.6 10.3
CONSUMER DISCRETIONARY (3.2) (3.3) 33.0 21.4
PRODUCER DURABLES (3.7) (9.4) 25.4 26.3
TECHNOLOGY (18.1) (16.0) 19.3 1.3
ENERGY (22.2) (16.0) 3.9 14.4
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 5
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL
EQUITIES II RUSSELL 2000
<S> <C> <C>
P/E RATIO (MEDIAN) 17.1 21.9
PRICE/BOOK 2.85 2.85
PRICE/SALES 0.99 1.47
- --------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 17.5% 21.4%
YEAR AVERAGE
- --------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $910 million $750 million
PORTFOLIO VALUE $166 million $873 billion
NUMBER OF HOLDINGS 48 1,894
- --------------------------------------------------------------------------------
TICKER SYMBOL: SPEQX
CUSIP #: 830833406
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</TABLE>
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
INTEGRATED HEALTH SERVICES, INC. (IHS)
Integrated Health Services is a leading national provider of health care
services in sub-acute settings. IHS provides an integrated network of facilities
and services to manage patients' recovery from illness. IHS benefits from the
constant pressure of reducing health care costs, as IHS provides care in the
lowest cost setting which HMOs and health insurers find very attractive. IHS
should enjoy strong earnings growth over the next few years due to improved
utilization of existing facilities and synergies from the numerous acquisitions
it has made. Currently, IHS trades at a significant discount to the market, its
peers, and its growth rate.
WORLD COLOR PRESS, INC. (WRC)
World Color Press has rapidly grown to become the third largest diversified
commercial printer in the United States and the industry's leading consolidator,
having successfully integrated 16 acquisitions since 1992. As a result, revenues
have grown from $660 million in 1992 to an estimated $2.0 billion in 1997. Rapid
industry consolidation should continue as customers increasingly demand the
greater economies, larger capacity, and state-of-the-art technologies WRC can
provide. WRC should continue to benefit in the form of additional acquisitions,
leading to strong earnings growth. Despite the bright prospects, WRC trades at a
compelling valuation.
6 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
TOP TEN HOLDINGS(3) % OF NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
BRYLANE INC.
Specialty catalogs 3.3%
UNITED STATIONERS INC.
Office products distributor 3.2%
INTEGRATED HEALTH SERVICES, INC.
Sub-acute health care services 3.0%
CDI CORP.
Temporary personnel/outsourcing 2.8%
CMAC INVESTMENT CORP.
Mortgage insurance 2.8%
TRIGON HEALTHCARE, INC.
Health maintenance organization 2.7%
HUGHES SUPPLY INC.
Construction/industrial supplies 2.6%
FURNITURE BRANDS INTL.
Furniture manufacturer 2.6%
WORLD COLOR PRESS, INC.
Commercial printer 2.6%
PENTAIR, INC.
Diversified manufacturer 2.5%
TOP TEN HOLDINGS 28.1%
</TABLE>
NOTES TO PERFORMANCE
(1) The performance for the one and three years ended December 31, 1997, and
for the period February 9, 1993 (inception) through December 31, 1997, is
an average annual total return calculation which is described in the Fund's
prospectus. Of course, past performance is no guarantee of future results.
The principal value and return on your investment will fluctuate and on
redemption may be worth more or less than your original cost.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. The S&P 500 Index, a widely quoted
stock market index, includes 500 of the largest companies publicly traded
in America. The S&P 400 Index includes 400 mid-sized companies publicly
traded in America. All figures take into account reinvested dividends. All
indexes and Fund characteristics are compiled by Frank Russell Company.
Sources: Lipper Analytical Services & Frank Russell Company.
(2) Return is calculated from the Fund's inception on February 9, 1993.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small- and mid-sized companies, which tend to be more volatile and less liquid
than stocks of large companies.
Distributor: Funds Distributor Inc.
ANNUAL REPORT - DECEMBER 31, 1997 7
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
----------- ------------ ------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 2.0%
OTHER TRANSPORTATION - 2.0%
Gulfstream Aerospace Corp.(a) Jet aircraft 114,800 $ 3,357,900
CONSUMER DISCRETIONARY - 28.9%
APPAREL/TEXTILES - 3.7%
Kellwood Co. Apparel maker 122,600 3,678,000
Tommy Hilfiger Corp.(a) Apparel maker 71,500 2,511,438
------------
6,189,438
COMMERCIAL SERVICES - 9.5%
Bell & Howell Co.(a) Info services/mailing eqpt. 158,500 3,833,718
CDI Corp.(a) Temporary personnel 102,800 4,703,100
Harland (John H.) Co. Check printing 87,800 1,843,800
United Stationers Inc.(a) Office products distributor 111,400 5,361,125
------------
15,741,743
CONSUMER PRODUCTS/SERVICES - 5.7%
Furniture Brands Intl.(a) Furniture manufacturer 210,800 4,321,400
Harman Intl. Industries, Inc. Audio equipment 41,300 1,752,668
Libbey Inc. Glass tableware 87,700 3,321,638
------------
9,395,706
PRINTING/PUBLISHING - 2.6%
World Color Press, Inc.(a) Commercial printer 161,500 4,289,844
RETAIL - 7.4%
Brylane Inc.(a) Specialty catalogs 110,400 5,437,200
Fingerhut Companies, Inc. Catalog retailer 186,900 3,994,987
Zale Corp.(a) Jewelry retailer 125,000 2,875,000
------------
12,307,187
------------
TOTAL CONSUMER DISCRETIONARY 47,923,918
CONSUMER STAPLES - 1.6%
International Multifoods Corp. Foodservice distribution 91,300 2,584,931
ENERGY - 4.9%
EXPLORATION & PRODUCTION - 4.9%
Forcenergy Inc.(a) Oil & gas producer 112,100 2,935,618
Newfield Exploration Co.(a) Oil & gas producer 16,800 391,650
Santa Fe Energy Resources(a) Oil & gas producer 185,000 2,081,250
Swift Energy Co.(a) Oil & gas producer 127,400 2,683,363
------------
TOTAL ENERGY 8,091,881
</TABLE>
8 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Company Number Market
Description Of Shares Value
----------- ------------ ------------
<S> <C> <C> <C>
FINANCIAL SERVICES - 23.1%
BANKS/THRIFTS - 1.9%
Peoples Heritage Financial
Group Maine-based thrift 68,700 $ 3,160,200
INSURANCE - 12.7%
American Heritage Life
Investment Life insurance firm 80,800 2,908,800
CMAC Investment Corp. Mortgage insurance 75,700 4,570,387
Enhance Financial
Services Grp Inc. Specialty reinsurance 68,200 4,057,900
Fremont General Corp. Workers' comp. insurance 71,600 3,920,100
Highlands Insurance
Group, Inc.(a) P & C insurance 86,600 2,457,275
Horace Mann Educators Corp. P & C insurance 107,200 3,048,500
------------
20,962,962
OTHER FINANCIAL SERVICES - 3.1%
Advanta Corp. Consumer finance 61,900 1,570,713
FIRSTPLUS Financial
Group, Inc.(a) Consumer finance firm 93,800 3,599,575
------------
5,170,288
REAL ESTATE INVESTMENT TRUSTS - 5.4%
American General
Hospitality Corp. Hotel properties REIT 120,700 3,228,725
Parkway Properties, Inc. Office buildings REIT 73,000 2,504,813
Prentiss Properties Trust Office/industrial REIT 118,300 3,305,006
------------
9,038,544
TOTAL FINANCIAL SERVICES 38,331,994
HEALTH CARE - 8.1%
HEALTH CARE SERVICES - 6.9%
Integrated Health Services, Inc. Sub-acute health care srvcs. 157,500 4,912,031
Sierra Health Services, Inc.(a) Health maintenance organ. 57,800 1,943,525
Trigon Healthcare, Inc.(a) Health maintenance organ. 173,400 4,530,075
------------
11,385,631
MEDICAL EQUIPMENT/PRODUCTS - 1.2%
Marquette Medical
Systems, Inc.(a) Monitoring equipment 74,900 1,994,213
------------
TOTAL HEALTH CARE 13,379,844
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 9
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997 (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
----------- ------------ ------------
<S> <C> <C> <C>
MATERIALS & PROCESSING - 7.2%
BUILDING/CONSTRUCTION PRODUCTS - 2.6%
Hughes Supply Inc. Construction/indust. supplies 124,150 $ 4,337,491
SPECIALTY CHEMICALS - 2.2%
International Specialty
Products Inc.(a) Fine chemicals 248,600 3,713,462
STEEL/IRON - 2.4%
UCAR International Inc.(a) Steelmaking materials 99,500 3,973,781
------------
TOTAL MATERIALS & PROCESSING 12,024,734
PRODUCER DURABLES - 12.1%
MACHINERY - 3.8%
AGCO Corp. Agriculture eqpt. producer 83,600 2,445,300
Cincinnati Milacron Inc. Cutting & machine tools 147,800 3,833,563
------------
6,278,863
OTHER PRODUCER DURABLES - 8.3%
General Cable Corp. Wire & cable producer 95,300 3,448,669
MagneTek, Inc.(a) Integrated electrical prods. 165,500 3,227,250
Pentair, Inc. Diversified manufacturer 113,300 4,071,719
TriMas Corp. Diversified manufacturer 86,200 2,963,125
------------
13,710,763
------------
TOTAL PRODUCER DURABLES 19,989,626
TECHNOLOGY - 6.5%
Coherent, Inc.(a) Laser manufacturer 111,700 3,923,463
Computer Products, Inc.(a) Power supplies 29,800 674,224
Galileo International, Inc.(a) Airline reservation system 106,500 2,942,063
Zebra Technologies Corp.(a) Bar coding equipment 106,800 3,177,300
------------
TOTAL TECHNOLOGY 10,717,050
------------
TOTAL COMMON STOCKS - 94.4%
(Cost: $136,070,248) 156,401,878
</TABLE>
10 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Market
Value
------------
<S> <C>
MONEY MARKET INSTRUMENTS(b)
Yield 5.33% to 5.64%
due January 1998 to September 1998
American Family Financial Services $ 205,048
General Mills, Inc. 1,208,644
Johnson Controls, Inc. 4,689,499
Pitney Bowes Credit Corp. 1,030,000
Warner Lambert Corp. 2,310,287
Wisconsin Electric Power Corp. 1,431,609
------------
TOTAL MONEY MARKET INSTRUMENTS - 6.6%
(Cost: $10,875,087) 10,875,087
------------
TOTAL INVESTMENTS - 101.0%
(Cost: $146,945,335) 167,276,965
OTHER LIABILITIES LESS ASSETS - (1.0%) (1,590,193)
------------
NET ASSETS - 100.0% $165,686,772
------------
------------
</TABLE>
(a) Non-income producing security.
(b) Variable rate securities. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on December 31, 1997.
Based on cost of investments for federal income tax purposes of $146,945,335 on
December 31, 1997, net unrealized appreciation was $20,331,630, consisting of
gross unrealized appreciation of $25,431,322 and gross unrealized depreciation
of $5,099,692.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 11
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $146,945,335) $167,276,965
Receivable for:
Dividends and interest $ 200,408
Shares sold 395,961 596,369
------------
Organization costs, net of accumulated
amortization of $17,089 5,152
------------
Total assets 167,878,486
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 1,815,540
Shares redeemed 155,825
Comprehensive management fee 207,061
Trustees' fees 1,338
Organization costs 11,950 2,191,714
------------ ------------
Net assets applicable to shares
outstanding $165,686,772
------------
------------
Shares outstanding--no par value
(unlimited number of shares authorized) 12,998,304
------------
------------
PRICING OF SHARES
Net asset value, offering price, and
redemption price per share $ 12.75
------------
------------
ANALYSIS OF NET ASSETS
Paid-in capital $144,120,733
Undistributed net realized gain on
sales of investments 1,234,409
Unrealized appreciation of investments 20,331,630
Net assets applicable to shares outstanding $165,686,772
------------
------------
</TABLE>
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
STATEMENT OF OPERATIONS Year Ended December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 1,105,769
Interest 516,124
------------
Total investment income 1,621,893
Expenses:
Comprehensive management fee 1,995,055
Fees to unaffiliated trustees 18,198
Amortization of organization costs 2,712
------------
Total expenses 2,015,965
------------
Net investment loss (394,072)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 22,856,580
Net change in unrealized appreciation 7,533,967
------------
Net realized and unrealized gain on investments 30,390,547
------------
Net increase in net assets resulting from operations $ 29,996,475
------------
------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/97 12/31/96
------------ ------------
<S> <C> <C>
From operations:
Net investment loss $ (394,072) $ (235,416)
Net realized gain on sales of investments 22,856,580 20,381,999
Net change in unrealized appreciation 7,533,967 2,418,395
------------ ------------
Net increase in net assets resulting
from operations 29,996,475 22,564,978
Distributions to shareholders from:
Net investment income -- (34,255)
Net realized gains (25,152,661) (16,359,084)
------------ ------------
Total distributions (25,152,661) (16,393,339)
From share transactions:
Proceeds from shares sold 124,093,499 20,849,640
Reinvestments of dividends
and capital gain distributions 24,674,327 16,109,334
Payments for shares redeemed (93,257,451) (27,001,291)
------------ ------------
Net increase in net assets
resulting from share transactions 55,510,375 9,957,683
------------ ------------
Total increase in net assets 60,354,189 16,129,322
Net assets at beginning of year 105,332,583 89,203,261
Net assets at end of year $165,686,772 $105,332,583
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
14 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year Year Year For the Period
Ended Ended Ended Ended 2/9/93(a)-
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 11.94 $ 11.29 $ 10.14 $ 10.79 $ 10.00
-------- -------- -------- -------- --------
Income from Investment
Operations
Net investment (loss) income (0.03) (0.02) 0.06 0.02 0.01
Net realized and unrealized
gain (loss) on investments 3.13 2.94 2.06 (0.19) 1.00
Total from Investment Operations 3.10 2.92 2.12 (0.17) 1.01
-------- -------- -------- -------- --------
Less distributions from:
Dividends from net investment income -- (0.01) (0.06) (0.02) --
Dividends from net realized
gains on investments (2.29) (2.26) (0.91) (0.46) (0.22)
-------- -------- -------- -------- --------
Total Distributions (2.29) (2.27) (0.97) (0.48) (0.22)
-------- -------- -------- -------- --------
Net asset value at end of period $ 12.75 $ 11.94 $ 11.29 $ 10.14 $ 10.79
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return 26.21% 26.60% 20.95% (1.52%) 10.08%(b)
Ratios/Supplemental Data
Ratio of expenses to average net assets 1.51% 1.53% 1.52% 1.51% 1.51%(c)
Ratio of net investment (loss) income
to average net assets (0.30%) (0.24%) 0.50% 0.22% (0.10%)(c)
Portfolio turnover rate 104% 145% 102% 82% 111%(c)
Net assets, end of period (in thousands) $165,687 $105,333 $ 89,203 $ 99,638 $ 58,608
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Average commission rate paid on stock transactions for the years ended
December 31, 1997 and December 31, 1996, was $0.0601 and $0.0619 per share,
respectively.
Effective August 31, 1995, the Fund's Investment Adviser changed from Mesirow
Asset Management, Inc., to Skyline Asset Management, L.P.
(a) Commencement of operations.
(b) For the period February 9, 1993 to December 31, 1993.
(c) Ratios have been determined on an annualized basis.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Skyline Funds is an open-ended, diversified investment management company which
consists of the Special Equities Portfolio, Special Equities II, and Small Cap
Contrarian. The Funds commenced public offering of their shares as follows:
Special Equities Portfolio on April 23, 1987, Special Equities II on February 9,
1993, and Small Cap Contrarian on December 15, 1997. The following notes relate
solely to the accompanying financial statements of Special Equities II ("Fund").
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
- - SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed), and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of money market instrument
premium and discount. Realized gains and losses from security transactions are
reported on an identified cost basis.
- - FUND SHARE VALUATION - Fund shares are sold on a continuous basis and
redeemed on a continuous basis at net asset value. Net asset value per share is
determined as of the close of regular session trading on the New York Stock
Exchange (normally 3:00 p.m. Central time) each day the Exchange is open for
trading. The net asset value per share is determined by dividing the value of
all securities and other assets, less liabilities, by the number of shares of
the Fund outstanding.
- - FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund's policy to comply with the special provisions of the Internal Revenue
Code available to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income. Such provisions were complied
with and, therefore, no federal income taxes have been accrued.
- - EXPENSES - Expenses arising in connection with a Fund are allocated to that
Fund. Other Skyline Funds expenses, such as trustees' fees, are allocated among
the three Skyline Funds.
- - RECLASSIFICATION - The 1997 net investment loss of $394,072 has been offset
against undistributed net realized gain at December 31, 1997.
16 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
- --------------------------------------------------------------------------------
2
TRANSACTIONS WITH AFFILIATES
The Fund's Investment Adviser is Skyline Asset Management, L.P. ("Adviser"). For
the Adviser's management and advisory services and the assumption of most of the
Fund's ordinary operating expenses, the Fund pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total comprehensive management
fee paid for the year ended December 31, 1997 was $1,995,055.
Certain officers and trustees of the Skyline Funds are also officers, limited
partners or shareholders of limited partners of the Adviser. The Fund makes no
direct payments to the officers or trustees who are affiliated with the Adviser.
For the year ended December 31, 1997, fees of $18,198 were paid by the Fund to
the unaffiliated trustees.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
12/31/97 12/31/96
--------------------------------
<S> <C> <C>
Shares sold 9,132,124 1,685,216
Shares issued
in reinvestment of dividends 1,959,834 1,398,376
------------ ------------
11,091,958 3,083,592
Less shares redeemed (6,913,355) (2,164,214)
------------ ------------
Net increase in shares outstanding 4,178,603 919,378
------------ ------------
------------ ------------
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1997 are as follows:
Cost of purchases $ 155,464,536
Proceeds from sales 128,929,303
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders of Skyline Special Equities II
and the Board of Trustees of Skyline Funds
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Special Equities II as of December 31,
1997, the related statements of operations for the year then ended and changes
in net assets for each of the two years in the period then ended, and the
financial highlights for each of the fiscal periods since 1993. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Skyline Special Equities II at December 31, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the fiscal
periods since 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 16, 1998
18 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FEDERAL TAX STATUS OF 1997 DIVIDENDS
- --------------------------------------------------------------------------------
Capital gain dividends paid to you, whether received in cash or reinvested in
shares, must be included in your federal income tax return and must be reported
by the Fund to the Internal Revenue Service in accordance with U.S. Treasury
Department regulations. Short-term capital gain dividends paid to you are
taxable as ordinary income. Long-term capital gain dividends paid to you are
taxable as long-term capital gain income regardless of how long you have held
Fund shares.
REPORT FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
This report, including the audited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund. The
report is not authorized for distribution to prospective investors in the Fund
unless it is accompanied or preceded by a currently effective prospectus of the
Fund.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
ANNUAL REPORT - DECEMBER 31, 1997 19
<PAGE>
This page left blank intentionally.
20 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
[LOGO]
Q4
SKYLINE SMALL CAP CONTRARIAN
INVESTING IN SMALL-SIZED COMPANIES
STRATEGY
- - Focus on solid companies that have fallen deeply out-of-favor
- - Value orientation - low price/book or price/sales ratios
- - No derivatives, shorting, hedging or currency plays
- - Market cap range of $50 million to $2 billion
DECEMBER 31, 1997
<PAGE>
LETTER FROM DAREN C. HEITMAN, PORTFOLIO MANAGER:(1)
- --------------------------------------------------------------------------------
January 31, 1998
Dear Shareholder:
In this inaugural letter for Skyline Small Cap Contrarian, the first order of
business is to thank all of you who showed confidence in our firm and its newest
product by investing.
My family's investment is right there with yours because I believe in the
strategy --buying the shares of good companies experiencing short-term problems.
Investors become very emotional about companies and stocks that are not
performing well, resulting in extremely low valuations regardless of the
long-term outlook. We seek to exploit these opportunities and wait for the
company to report better results; if the results come through as we expect, the
share price gains can be terrific.
The Fund began operations on December 15, 1997. With an ending share price equal
to its initial share price of $10.00, the Fund's performance through its first
two weeks was pretty uneventful. The Fund ended the year with 36 stocks and just
over 10% of its assets in cash. Our goal is to increase the total number of
holdings to 50 and get the cash down to about 5% of assets by the end of the
first quarter.
The Fund at year-end was well diversified among several industries, but a few
points are worth noting. First, you might have noticed the large technology
weighting. This is because there are currently many good technology companies
selling at very depressed prices. This situation resulted from the news out of
Asia of rapidly declining currencies, which rightfully spooked many technology
investors, as well as normal cyclical downturns in some specific sectors, such
as computer disk drives. Longer term, I expect there to always be opportunities
to buy technology companies at great prices. This sector is especially
vulnerable to the overselling that accompanies poor financial performance
because of the perceived risk of the stocks and the investment style of most
technology investors. However, many of these companies have very diverse product
lines, long product life cycles, and strong balance sheets. These strengths
provide the contrarian investor with the opportunity to buy healthy, growing
companies with attractive return on capital measures at terrific prices. With
time, we believe these companies can generate much higher valuations when their
financial results improve.
On the other hand, the financial sector is substantially underweighted. This
underweighting is not the result of some macro forecast for interest rates or
any strong distaste for financial companies. It resulted simply because most
sectors of the financial industry have performed quite well for several years,
and the stocks do not fit the profile we are seeking. Also worth noting is that
the Fund is not laden with deeply cyclical companies, such as steel or paper.
While there will always be economically sensitive companies in the Fund, I would
like it to be dominated by companies with what we believe are attractive
long-term growth opportunities.
ANNUAL REPORT - DECEMBER 31, 1997 1
<PAGE>
The biggest disadvantage of managing a contrarian fund is the absolute certainty
of occasionally looking foolish. When a portfolio manager purchases the stock of
a popular company and the stock declines, everyone asks, "What's wrong with that
company's management team? They couldn't deliver what they promised."
In contrast, when a portfolio manager purchases the stock of a company having
problems and the stock declines, people ask, "What's wrong with that portfolio
manager? It was obvious that stock wasn't going to perform well." My request
to you is to keep this in mind when you look at the performance of individual
stocks in the Fund. If you cannot find something to dislike about some of these
companies, they probably do not belong in a contrarian fund.
With a median price/book value ratio of just over 1.1, our portfolio of stocks
is one of the cheapest available to fund investors. Yet we believe that all of
these companies have the potential to sustain earnings at much higher levels. I
am excited about the potential of this Fund and hope to reward richly those who
showed early confidence in us and this investment style.
/s/ Daren Heitman
2 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
PERFORMANCE (%)(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q Since
1997 Inception(2)
<S> <C> <C>
SMALL CAP CONTRARIAN 0.00 0.00
RUSSELL 2000 3.91 3.91
S&P 500 0.80 0.80
</TABLE>
SECTOR WEIGHTINGS (as of December 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Other 2.4%
Cash 10.5%
Autos & Transportation 5.9%
Technology 17.2%
Consumer Discretionary 19.3%
Producer Durables 12.7%
Consumer Staples 2.1%
Materials & Processing 4.5%
Energy 4.9%
Health Care 13.1%
Financial Services 7.4%
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 3
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
CONTRARIAN RUSSELL 2000 S&P 500
<S> <C> <C> <C>
PRICE/BOOK 1.19 2.85 4.11
PRICE/SALES 0.75 1.47 1.77
P/E RATIO (MEDIAN) 28.5 21.9 21.6
- -------------------------------------------------------------------------------------------------
EPS GROWTH CURRENT FISCAL 0.20% 21.4% 12.6%
YEAR AVERAGE
- -------------------------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $140 million $750 million $34 billion
PORTFOLIO VALUE $4.8 million $873 billion $7,536 billion
NUMBER OF HOLDINGS 36 1,894 500
- -------------------------------------------------------------------------------------------------
CUSIP #: 830833604
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</TABLE>
STOCK HIGHLIGHTS(3)
- --------------------------------------------------------------------------------
INSURANCE AUTO AUCTIONS, INC. (IAAI)
Insurance Auto Auctions provides insurance companies with an outlet for selling
totaled vehicles by holding periodic auctions for salvage buyers. Over the past
few years, the company suffered under multi-year contracts that did not provide
the firm with an adequate profit per vehicle processed. These contracts have
nearly run their course, and Insurance Auto's new management is incorporating an
attractive, fixed-fee margin into the new contracts. Despite an apparently
imminent recovery in earnings, the shares are trading below stated book value.
Our estimate for potential earnings per share is $1.50, including roughly $0.30
per share in non-cash goodwill amortization.
KOMAG, INCORPORATED (KMAG)
Komag manufactures the disks that store data in computer disk drives, a market
expected to grow rapidly over the long term. As the technology leader, Komag has
historically sold its products to the high-end disk drive market, which is
currently suffering through a downturn. As a result, Komag's capacity is
underutilized and profits are suffering. However, management is very strong, and
the company has a long record of success in this market. At the current price,
the stock is selling at 1.2x book value and a very low multiple of our estimate
of potential earnings of $2.50 or more per share.
4 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS(3) % OF NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
CREDIT ACCEPTANCE CORP.
Automobile finance services 4.3%
QUEST DIAGNOSTICS INC.
Diagnostic testing services 3.8%
BINKS-SAMES CORP.
Spray coating equipment 3.8%
INSURANCE AUTO AUCTIONS, INC.
Auto salvage 3.8%
KOMAG, INC.
Computer components 3.5%
CLINTRIALS RESEARCH INC.
Contract research firm 3.4%
BROWN & SHARPE MANUFACTURING
Metrology instruments 3.0%
TRIGON HEALTHCARE, INC.
Health maintenance organization 3.0%
ELSAG BAILEY PROCESS AUTOMATION N.V.
Process control systems 3.0%
SENSORMATIC ELECTRONICS CORP.
Anti-theft devices 2.9%
TOP TEN HOLDINGS 34.5%
</TABLE>
NOTES TO PERFORMANCE
(1) The performance for the period December 15, 1997 (inception) through
December 31, 1997, is a total return calculation (not annualized) which is
described in the Fund's prospectus. Of course, past performance is no
guarantee of future results. The principal value and return on your
investment will fluctuate and on redemption may be worth more or less than
your original cost.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. The S&P 500 Index, a widely quoted
stock market index, includes 500 of the largest companies publicly traded
in America. All figures take into account reinvested dividends. All indexes
and Fund characteristics are compiled by Frank Russell Company.
Source: Frank Russell Company.
(2) Return is calculated from the Fund's inception on December 15, 1997.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor Inc.
ANNUAL REPORT - DECEMBER 31, 1997 5
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 5.9%
AUTO RELATED - 1.9%
APS Holding Corp.(a) Aftermarket auto parts dist. 36,500 $ 91,250
OTHER TRANSPORTATION - 2.1%
Mesa Air Group, Inc.(a) Regional airline 20,200 99,738
RAILROAD - 1.9%
RailTex, Inc.(a) Freight services 6,400 91,600
---------
TOTAL AUTOS & TRANSPORTATION 282,588
CONSUMER DISCRETIONARY - 19.3%
COMMERCIAL SERVICES - 5.4%
Insurance Auto Auctions, Inc.(a) Auto salvage 15,500 178,250
Right Management
Consultants, Inc.(a) Outplacement & HR services 6,300 80,325
---------
258,575
CONSUMER PRODUCTS/SERVICES - 9.2%
American Residential
Services, Inc.(a) HVAC repair services 7,800 121,875
Drypers Corp.(a) Makes disposable diapers 11,600 68,150
Global Motorsport Group, Inc.(a) Motorcycle accessories 11,200 130,200
LADD Furniture, Inc.(a) Furniture manufacturer 7,800 117,000
---------
437,225
RETAIL - 4.7%
Discount Auto Parts, Inc.(a) Auto parts stores 4,800 91,800
Lechters, Inc.(a) Housewares chain 25,500 129,094
---------
220,894
---------
TOTAL CONSUMER DISCRETIONARY 916,694
CONSUMER STAPLES - 2.1%
ProSource, Inc.(a) Foodservice distribution 13,100 98,250
ENERGY - 4.9%
EXPLORATION & PRODUCTION - 2.0%
Comstock Resources, Inc.(a) Oil & gas producer 8,200 97,888
OTHER ENERGY - 2.9%
Willbros Group Inc.(a) Engineering/construction firm 9,100 136,500
---------
TOTAL ENERGY 234,388
6 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
- ---------------------------------------------------------------------------------------
<CAPTION>
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
FINANCIAL SERVICES - 7.4%
INSURANCE - 1.6%
Highlands Insurance
Group, Inc.(a) P & C insurance 2,000 $ 56,750
Navigators Group, Inc. (The) P & C insurance 1,200 22,275
---------
79,025
OTHER FINANCIAL SERVICES - 5.8%
Advanta Corp. Consumer finance 2,800 71,050
Credit Acceptance Corp.(a) Automobile finance services 26,300 203,825
---------
274,875
---------
TOTAL FINANCIAL SERVICES 353,900
HEALTH CARE - 13.1%
HEALTH CARE SERVICES - 10.2%
ClinTrials Research Inc.(a) Contract research firm 20,800 163,800
Quest Diagnostics Inc.(a) Diagnostic testing services 10,800 182,250
Trigon Healthcare, Inc.(a) Health maintenance organ. 5,400 141,075
---------
487,125
MEDICAL EQUIPMENT/PRODUCTS - 2.9%
Allied Healthcare
Products, Inc.(a) Makes respiratory products 17,500 135,625
---------
TOTAL HEALTH CARE 622,750
MATERIALS & PROCESSING - 4.5%
METAL FABRICATIONS - 2.5%
Atchison Casting Corp.(a) Steel & iron castings 7,300 118,625
STEEL/IRON - 2.0%
Birmingham Steel Corp.(a) Steel mini-mill 5,900 92,925
---------
TOTAL MATERIALS & PROCESSING 211,550
PRODUCER DURABLES - 12.7%
MACHINERY - 6.8%
Binks-Sames Corp. Spray coating equipment 4,300 181,675
Brown & Sharpe Manufacturing(a) Metrology instruments 13,900 141,606
---------
323,281
ANNUAL REPORT - DECEMBER 31, 1997 7
<PAGE>
PORTFOLIO HOLDINGS as of December 31, 1997 (continued)
- --------------------------------------------------------------------------------
<CAPTION>
Company Number Market
Description Of Shares Value
---------------------------- --------- -----------
<S> <C> <C> <C>
OTHER PRODUCER DURABLES - 5.9%
Elsag Bailey Process
Automation N.V.(a) Process control systems 8,500 $ 140,250
Sensormatic Electronics Corp. Anti-theft devices 8,500 139,719
---------
279,969
---------
TOTAL PRODUCER DURABLES 603,250
TECHNOLOGY - 17.2%
GENICOM Corp.(a) Computer support services 8,200 94,300
Imation Corp.(a) Data storage products 8,500 136,000
Komag, Inc.(a) Computer components 11,200 166,600
MEMC Electronic
Materials, Inc.(a) Produces silicon wafers 6,000 91,500
PSC Inc.(a) Bar coding equipment 7,200 94,950
Smartflex Systems, Inc.(a) Flexible circuit assembler 12,000 114,000
Unit Instruments, Inc.(a) Gas flow controllers 12,500 117,969
---------
TOTAL TECHNOLOGY 815,319
OTHER - 2.4%
SPACEHAB, Inc.(a) Lab & supply modules 10,900 115,130
---------
TOTAL COMMON STOCKS - 89.5%
(Cost: $4,242,649) 4,253,819
8 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
- ---------------------------------------------------------------------------------------
<CAPTION>
Market
Value
-----------
<S> <C>
MONEY MARKET INSTRUMENTS(b)
Yield 5.33% to 5.64%
due January 1998 to September 1998
American Family Financial Services $ 174,970
General Mills, Inc. 165,000
Johnson Controls, Inc. 180,744
Pitney Bowes Credit Corp. 165,000
Sara Lee Corp. 165,000
Warner Lambert Corp. 211,414
Wisconsin Electric Power Corp. 212,000
---------
TOTAL MONEY MARKET INSTRUMENTS - 26.8%
(Cost: $1,274,128) 1,274,128
---------
TOTAL INVESTMENTS - 116.3%
(Cost: $5,516,777) 5,527,947
OTHER LIABILITIES LESS ASSETS - (16.3%) (775,430)
---------
NET ASSETS - 100.0% $ 4,752,517
-----------
-----------
</TABLE>
(a) Non-income producing security.
(b) Variable rate securities. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on December 31, 1997.
Based on cost of investments for federal income tax purposes of $5,516,777 on
December 31, 1997, net unrealized appreciation was $11,170, consisting of gross
unrealized appreciation of $94,423 and gross unrealized depreciation of $83,253.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 9
<PAGE>
STATEMENT OF ASSETS & LIABILITIES as of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $5,516,777) $ 5,527,947
Receivable for:
Interest $ 3,655
Shares sold 69,201 72,856
----------
Organization costs, net of accumulated
amortization of $438 46,842
----------
Total assets 5,647,645
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 845,087
Comprehensive management fee 2,761
Organization costs 47,280 895,128
---------- ----------
Net assets applicable to shares
outstanding $ 4,752,517
-----------
-----------
Shares outstanding--no par value
(unlimited number of shares authorized) 475,038
-----------
-----------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 10.00
-----------
-----------
ANALYSIS OF NET ASSETS
Paid-in capital $ 4,741,347
Unrealized appreciation of investments 11,170
-----------
Net assets applicable to shares outstanding $ 4,752,517
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
10 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
STATEMENT OF OPERATIONS For the Period December 15, 1997(a) to December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Interest income $ 2,652
Expenses:
Comprehensive management fee 2,758
Amortization of organization costs 438
---------
Total expenses 3,196
---------
Net investment loss (544)
Net change in unrealized appreciation 11,170
---------
Net increase in net assets resulting from operations $ 10,626
---------
---------
</TABLE>
(a) Commencement of operations.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 11
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
12/15/97(a)-12/31/97
--------------------
<S> <C>
From operations:
Net investment loss $ (544)
Net change in unrealized appreciation 11,170
-----------
Net increase in net assets resulting from operations 10,626
From share transactions:
Proceeds from shares sold 4,743,861
Payments for shares redeemed (1,970)
-----------
Net increase in net assets resulting from share transactions 4,741,891
-----------
Total increase in net assets 4,752,517
Net assets at beginning of period 0
-----------
Net assets at end of period $ 4,752,517
-----------
-----------
</TABLE>
(a) Commencement of operations.
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
12/15/97(a)-
12/31/97
---------------
<S> <C>
Net asset value at beginning of period $ 10.00
-------
Income from investment operations
Net investment loss 0.00
Net realized and unrealized gain on investments 0.00
-------
Total from investment operations 0.00
-------
Net asset value at end of period $ 10.00
-------
-------
Total Return 0.00%(b)
Ratios/Supplemental Data
Ratio of expenses to average net assets 1.71%(c)
Ratio of net investment loss to average net assets (0.29%)(c)
Portfolio turnover rate 0%(c)
Net assets, end of period (in thousands) $ 4,753
-------
-------
</TABLE>
Average commission rate paid on stock transactions for the period December 15,
1997 to December 31, 1997 was $0.0514 per share.
(a) Commencement of operations.
(b) For the period December 15, 1997 to December 31, 1997.
(c) Ratios have been determined on an annualized basis.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1997 13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Skyline Funds is an open-ended, diversified investment management company which
consists of Special Equities Portfolio, Special Equities II, and Small Cap
Contrarian. The Funds commenced public offering of their shares as follows:
Special Equities Portfolio on April 23, 1987, Special Equities II on February 9,
1993, and Small Cap Contrarian on December 15, 1997. The following notes relate
solely to the accompanying financial statements of Small Cap Contrarian
("Fund").
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of a market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
- - SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of premium and discount on money
market instruments. Realized gains and losses from security transactions are
reported on an identified cost basis.
- - FUND SHARE VALUATION - Fund shares are sold and redeemed on a continuous
basis at net asset value. Net asset value per share is determined as of the
close of regular session trading on the New York Stock Exchange (normally 3:00
p.m. Central time), each day the Exchange is open for trading. The net asset
value per share is determined by dividing the value of all securities and other
assets, less liabilities, by the number of shares of the Fund outstanding.
- - FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund's policy to comply with the special provisions of the Internal Revenue
Code available to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income. Such provisions were complied
with and, therefore, no federal income taxes have been accrued.
- - EXPENSES - Expenses arising in connection with a Fund are allocated to that
Fund. Other Skyline Funds expenses, such as trustees' fees, are allocated among
the three Skyline Funds.
- - RECLASSIFICATION - The 1997 net investment loss of $544 has been offset
against paid-in capital at December 31, 1997.
14 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
- --------------------------------------------------------------------------------
2
TRANSACTIONS WITH AFFILIATES
The Fund's Investment Adviser is Skyline Asset Management, L.P. ("Adviser"). For
the Adviser's management and advisory services and the assumption of most of the
Fund's ordinary operating expenses, the Fund pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total comprehensive management
fee paid for the period December 15, 1997 to December 31, 1997 was $2,785. The
Adviser has agreed to reimburse the Fund to the extent that the aggregate annual
expenses of the Fund, including the advisory fee and fees to unaffiliated
trustees, but excluding extraordinary costs or expenses such as legal,
accounting, or other costs or expenses not incurred in the normal course of the
Fund's ongoing operations, exceed 1.75% of the average daily net assets of the
Fund.
Certain officers and trustees of the Skyline Funds are also officers, limited
partners or shareholders of limited partners of the Adviser. The Fund makes no
direct payments to the officers or trustees who are affiliated with the Adviser.
For the period December 15, 1997 to December 31, 1997, no fees were paid by the
Fund to the unaffiliated trustees.
In connection with the organization of the Fund, organizational costs of $47,280
was advanced to the Fund by the Adviser. This expense is being amortized on a
straight line basis through December 15, 2002. The Fund will reimburse the
Adviser for such expenses in equal installments without interest over 20
calendar quarters.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statement of changes in net assets are
as follows:
<TABLE>
<CAPTION>
For the Period
12/15/97 to 12/31/97
--------------------
<S> <C>
Shares sold 475,238
Less shares redeemed (200)
-----------------
Net increase in shares outstanding 475,038
-----------------
-----------------
</TABLE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the period
December 15, 1997 to December 31, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost of purchases $4,242,649
Proceeds from sales 0
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1997 15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders of Skyline Small Cap Contrarian
and the Board of Trustees of Skyline Funds
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Small Cap Contrarian as of December 31,
1997, the related statements of operations and changes in net assets, and the
financial highlights for the period December 15, 1997 (commencement of
operations) to December 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of December 31, 1997 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Skyline Small Cap Contrarian at December 31, 1997 and the results of its
operations, the changes in its net assets, and the financial highlights for the
period December 15, 1997 to December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 16, 1998
16 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
REPORT FOR THE PERIOD ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
This report, including the audited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund. The
report is not authorized for distribution to prospective investors in the Fund
unless it is accompanied or preceded by a currently effective prospectus of the
Fund.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
ANNUAL REPORT - DECEMBER 31, 1997 17
<PAGE>
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18 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
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ANNUAL REPORT - DECEMBER 31, 1997 19
<PAGE>
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20 ANNUAL REPORT - DECEMBER 31, 1997
<PAGE>
For 24-hour Skyline Funds prices CALL: 1.800.828.2SKY
(1.800.828.2759)
To speak with a Skyline Funds Representative
during normal business hours CALL: 1.800.458.5222
- --------------------------------------------------------------------------------
[LOGO]
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
