<PAGE>
SEMI-ANNUAL REPORT -- June 30, 1999
SKYLINE SMALL CAP
CONTRARIAN
-----------------------
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
[SKYLINE LOGO]
SKYLINE Funds
<PAGE>
LETTER from Daren C. Heitman, Portfolio Manager:(1)
- ------------------------------------------------------------------------
June 30, 1999
Dear Shareholder:
OVERVIEW
The Fund advanced 21.82% in the June quarter compared to 15.55% for the Russell
2000 Index. For the first six months of the year, the Fund increased 16.20%
compared to a 9.28% gain for the Russell 2000 Index. Relative to other small cap
value funds, the performance looks even stronger. The average small cap value
fund rose 6.44% during the first six months of 1999.
MARKET REVIEW
The big news of the second quarter was the improved performance of small cap
stocks with the Russell 2000 Index showing a gain of 15.55% compared to a 6.92%
return for the S&P 500 Index. This turnaround started in mid-April when first
quarter earnings reports were announced. Investors noticed that profit growth
was accelerating after a difficult second half of 1998. At the same time,
companies reported that results from Asia were improving. This occurred at a
time when relative valuations favored small cap stocks. The combination of low
valuations and good financial news sparked a meaningful rally.
In terms of investment styles, both growth and value managers could find
something positive in the period. Value-oriented investment strategies saw
improved results due largely to big gains registered by cyclical sectors of the
market. Investors reasoned that improving worldwide economic news was positive
for cyclical companies. At the same time, the technology sector was very strong,
helping growth stock managers. Interestingly, consumer stocks were laggards
during the period despite very strong consumer spending trends.
PORTFOLIO REVIEW
On balance, sector weightings helped the Fund's performance. With the exception
of the technology sector, the strongest performing sectors were overweighted in
the Fund. Above-average exposure to the cyclical areas of the economy, such as
materials & processing and producer durables, was especially beneficial during
the quarter.
One of the primary messages conveyed in our first quarter letter to you was that
a critical number of companies in the Fund were experiencing an improvement in
their business trends. That strength continued into the second quarter, with 80%
of the companies in the Fund meeting or exceeding our earnings expectations.
When combined with extremely low valuations, this strength had a very positive
impact on share prices. In fact, the ten top performing stocks during the
quarter gained 40% to 80% due to strong company fundamentals and low valuations
at the beginning of the quarter. Also, two stocks moved higher when the
companies received takeover offers. Such price gains reflect just how
undervalued those small cap stocks were earlier in the year. We believe this
re-valuation process is still in its early stages, as many of the holdings
remain extremely inexpensive.
SEMI-ANNUAL REPORT - JUNE 30, 1999 1
<PAGE>
OUTLOOK
We believe that a major change occurred in the stock market in April that will
be positive for the Fund going forward. After an extended period of
outperformance by large cap stocks and growth-oriented strategies, a shift
occurred in April that favored small cap stocks and value-oriented strategies.
We believe this shift occurred because of superior relative valuation, an
improving worldwide economic environment, and better corporate earnings growth.
In terms of relative valuation, small cap stocks have not been so attractively
priced since the early 1970s. After trading near parity with large cap stocks
for most of the past 20 years, small cap stocks are currently trading at a very
large discount. A move back to parity from current levels would provide an
enormous performance advantage for small cap stocks.
We believe the catalyst for such a move is the improving international economic
situation along with better corporate earnings growth. Recent developments on
the international front have been encouraging, and corporate earnings growth
picked up in the March quarter following a rather dismal showing in the last
half of 1998. Further improvement in these areas should strongly help small cap
valuations.
At an average price/book ratio of 1.1, the individual holdings in the Fund are
still remarkably cheap. We believe the move in small cap stocks in the June
quarter is just the beginning of a very long period of strong relative
performance and the Fund is well positioned to benefit from this trend over the
coming years.
/s/ Daren Heitman
PORTFOLIO Characteristics(1)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
CONTRARIAN RUSSELL 2000 S&P 500
<S> <C> <C> <C>
PRICE/BOOK 1.13 2.44 5.21
PRICE/SALES 0.53 1.22 2.26
P/E RATIO (MEDIAN) 16.6 22.8 26.2
- -----------------------------------------------------------------------------
EPS GROWTH--5 YRS 4.7% 14.1% 14.8%
(HISTORICAL)
EPS GROWTH--1 YR (FORECASTED) 12.9% 17.1% 18.2%
- -----------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $200 million $730 million $70 billion
PORTFOLIO VALUE $4.4 million $913 billion $11,213 billion
NUMBER OF HOLDINGS 45 2000 500
- -----------------------------------------------------------------------------
CUSIP #: 830833604
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
NET ASSET VALUE (PER SHARE): $8.32
</TABLE>
2 SEMI-ANNUAL REPORT - JUNE 30, 1999
<PAGE>
- - PERFORMANCE (%)(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
Calendar Years
2Q Since --------------------
1999 YTD 1 yr. Inception(2) 1998 1997(2)
<S> <C> <C> <C> <C> <C> <C>
SMALL CAP CONTRARIAN 21.82 16.20 -16.80 -11.24 -28.4 0.00
RUSSELL 2000 15.55 9.28 1.50 6.79 -2.6 3.91
S&P 500 6.92 12.22 22.71 27.61 28.8 0.80
</TABLE>
- - SECTOR Weightings (as of June 30, 1999)
- -----------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Consumer Discretionary 20.8%
Energy 4.8%
Financial Services 10.3%
Health Care 12.4%
Materials & Processing 18.7%
Other 1.7%
Producer Durables 10.7%
Technology 8.7%
Cash 4.0%
Autos & Transportation 7.9%
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1999 3
<PAGE>
- - TOP Ten Holdings(3)
<TABLE>
<CAPTION>
% OF NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
QUEST DIAGNOSTICS INC.
Diagnostic testing services 3.2%
ANGELICA CORP.
Textile rental services 2.9%
WABASH NATIONAL CORP.
Makes truck trailers 2.8%
IMATION CORP.
Data storage products 2.8%
DT INDUSTRIES, INC.
Packaging equipment 2.8%
KENNAMETAL INC.
Metal-cutting tools 2.7%
CHICAGO BRIDGE & IRON CO.
Maker of steel tanks 2.7%
ARROW ELECTRONICS, INC.
Distributes electronic components 2.5%
OFFSHORE LOGISTICS, INC
Offshore transportation services 2.4%
CREDIT ACCEPTANCE CORP.
Automobile finance services 2.4%
TOP TEN HOLDINGS 27.2%
</TABLE>
- - SECTOR Performance(1) (as of June 30, 1999)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
2Q 1999 YTD 1999
- ----------------------------------------------- -----------------------------------------------
SMALL CAP RUSSELL SMALL CAP RUSSELL
CONTRARIAN 2000 CONTRARIAN 2000
<S> <C> <C> <C> <C> <C>
Producer Durables 54.0% 23.7% Energy 34.4% 33.2%
- ----------------------------------------------- -----------------------------------------------
Consumer Discretionary 34.7 9.5 Consumer Discretionary 32.3 10.6
- ----------------------------------------------- -----------------------------------------------
Materials & Processing 30.7 19.9 Producer Durables 31.6 10.7
- ----------------------------------------------- -----------------------------------------------
Energy 29.2 26.3 Materials & Processing 20.9 5.9
- ----------------------------------------------- -----------------------------------------------
Technology 24.5 21.5 Health Care 17.7 -0.8
- ----------------------------------------------- -----------------------------------------------
Financial Services 9.9 12.2 Autos & Transportation 11.6 9.4
- ----------------------------------------------- -----------------------------------------------
Health Care -3.2 11.5 Financial Services -4.2 4.7
- ----------------------------------------------- -----------------------------------------------
Autos & Transportation -3.6 23.4 Technology -4.8 17.9
- ----------------------------------------------- -----------------------------------------------
Other -21.1 18.0 Other -51.1 -1.9
- ----------------------------------------------- -----------------------------------------------
Consumer Staples N/A* 6.9 Consumer Staples N/A* -9.8
- ----------------------------------------------- -----------------------------------------------
Utilities N/A* 16.7 Utilities N/A* 20.9
- ----------------------------------------------- -----------------------------------------------
</TABLE>
* Not Applicable
4 SEMI-ANNUAL REPORT - JUNE 30, 1999
<PAGE>
STOCK Highlights(3)
- ------------------------------------------------------------------------
KENNAMETAL INC. (KMT)
KMT is the leading producer of metal-cutting tools in the North American market.
Because these products are consumed in the manufacturing process, KMT has a high
degree of repeat business, which adds stability to financial results. Earnings
declined sharply during the last 12 months due to a large acquisition of a
struggling company and a downturn in the U.S. industrial sector but appear to
have bottomed at $1.80 per share. We estimate KMT's earnings power at $4.00 per
share in the next up cycle compared to our purchase price of $20 per share.
OMNICARE, INC. (OCR)
OCR fills pharmaceutical prescriptions primarily for nursing homes. Recently,
OCR's services were negatively impacted due to a change in the way nursing homes
are reimbursed by the government for Medicare patients. As a result, OCR's
earnings are expected to be about flat in 1999 after nearly 10 years of
uninterrupted growth. However, we feel the long-term growth prospects for this
market share leader are still very attractive. We recently purchased the stock
at about $13 per share, or 11x this year's EPS estimate and 1.2x book value,
despite expected long-term earnings growth of 15% or more.
NOTES TO PERFORMANCE
(1) 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 performance for the year ended June 30,
1999, and for period December 15, 1997 (inception) through June 30, 1999, is
an average annual total return calculation which is described in the Fund's
prospectus.
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
portfolio characteristics are compiled by Frank Russell Company.
Sources: Frank Russell Company and Morningstar Inc.
(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 cap companies, which tend to be more volatile and less liquid than stocks
of large cap companies.
DISTRIBUTOR: FUNDS DISTRIBUTOR INC.
SEMI-ANNUAL REPORT - JUNE 30, 1999 5
<PAGE>
- - PORTFOLIO Holdings as of June 30, 1999 (unaudited)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 7.9%
OTHER TRANSPORTATION - 7.9%
Interpool, Inc. Container leasing firm 6,600 $ 85,800
Kitty Hawk, Inc.(a) Air freight services 7,800 61,425
Mesa Air Group, Inc.(a) Regional airline 13,600 102,212
Trailer Bridge, Inc.(a) Marine transportation 47,500 97,969
------------
TOTAL AUTOS & TRANSPORTATION 347,406
CONSUMER DISCRETIONARY - 20.8%
COMMERCIAL SERVICES - 11.6%
Angelica Corp. Textile rental services 7,300 128,662
DIMON Inc. Tobacco leaf wholesaler 19,000 98,563
Insurance Auto Auctions(a) Auto salvage 5,200 83,850
LESCO, Inc. Lawn care products 5,000 95,625
Right Mgmt Consultants(a) Outplacement & HR services 6,700 103,850
------------
510,550
CONSUMER PRODUCTS/SERVICES - 4.0%
Drypers Corp.(a) Makes disposable diapers 28,800 80,100
LADD Furniture, Inc.(a) Furniture manufacturer 4,600 96,600
------------
176,700
PRINTING/PUBLISHING - 2.0%
Cadmus Communications Corp. Commercial printer 6,500 89,375
RETAIL - 3.2%
Discount Auto Parts, Inc.(a) Auto parts stores 2,600 62,725
InterTAN, Inc.(a) Consumer electronics retailer 3,700 75,850
------------
138,575
------------
TOTAL CONSUMER DISCRETIONARY 915,200
ENERGY - 4.8%
OTHER ENERGY - 4.8%
Offshore Logistics, Inc(a) Offshore transportation 9,600 106,800
Willbros Group, Inc.(a) Engineering/construction 12,200 103,700
------------
TOTAL ENERGY 210,500
FINANCIAL SERVICES - 10.3%
INSURANCE - 6.1%
Highlands Insurance Group, Inc.(a) P&C insurance 7,300 76,650
Navigators Group, Inc. (The)(a) P&C insurance 6,100 91,500
SCPIE Holdings Inc. Malpractice insurance 3,000 97,875
------------
266,025
</TABLE>
6 SEMI-ANNUAL REPORT - JUNE 30, 1999
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
OTHER FINANCIAL SERVICES - 4.2%
American Capital Strategies, Ltd. Commercial finance 4,500 $ 82,125
Credit Acceptance Corp.(a) Automobile finance services 17,400 104,400
------------
186,525
------------
TOTAL FINANCIAL SERVICES 452,550
HEALTH CARE - 12.4%
HEALTH CARE SERVICES - 10.9%
AmeriPath, Inc.(a) Physician practice mgmt. 11,800 101,775
ClinTrials Research Inc.(a) Contract research firm 16,900 84,500
Coram Healthcare Corp.(a) Home infusion services 29,500 51,625
Omnicare, Inc. Pharmaceutical services 8,100 102,263
Quest Diagnostics Inc.(a) Diagnostic testing services 5,100 139,612
------------
479,775
MEDICAL EQUIPMENT/PRODUCTS - 1.5%
Allied Healthcare Products, Inc.(a) Makes respiratory products 41,100 68,071
------------
TOTAL HEALTH CARE 547,846
MATERIALS & PROCESSING - 18.7%
BUILDING/CONSTRUCTION PRODUCTS - 4.9%
Chicago Bridge & Iron Co. Maker of steel tanks 8,500 118,469
Interface, Inc. Carpet producer 11,100 95,737
------------
214,206
INDUSTRIAL PRODUCTS - 1.9%
Global Industrial Tech.(a) Conglomerate 7,100 85,644
METAL FABRICATIONS - 5.8%
Atchison Casting Corp.(a) Steel & iron castings 7,000 72,188
Brush Wellman Inc. Engineered materials 5,000 90,625
Citation Corp.(a) Castings manufacturer 5,800 93,162
------------
255,975
OTHER MATERIALS & PROCESSING - 2.3%
Material Sciences Corp.(a) Specialty coated materials 6,800 102,000
SPECIALTY CHEMICALS - 1.9%
Wellman, Inc. PET resins/polyester fibers 5,200 82,875
STEEL/IRON - 1.9%
Birmingham Steel Corp. Steel mini-mill 20,300 83,738
------------
TOTAL MATERIALS & PROCESSING 824,438
PRODUCER DURABLES - 10.7%
CAPITAL GOODS - 5.6%
Kennametal Inc. Metal-cutting tools 3,900 120,900
Wabash National Corp. Makes truck trailers 6,400 124,000
------------
244,900
------------
</TABLE>
SEMI-ANNUAL REPORT - JUNE 30, 1999 7
<PAGE>
- - PORTFOLIO Holdings as of June 30, 1999 (continued, unaudited)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
ELECTRICAL EQUIPMENT/PRODUCTS - 2.3%
Sensormatic Electronics Corp.(a) Anti-theft devices 7,400 $ 103,138
MACHINERY - 2.8%
DT Industries, Inc. Packaging equipment 13,200 121,275
------------
TOTAL PRODUCER DURABLES 469,313
TECHNOLOGY - 8.7%
CONTRACT MANUFACTURING - 1.3%
Smartflex Systems, Inc.(a) Flexible circuit assembler 16,600 54,988
DISTRIBUTION - 2.5%
Arrow Electronics, Inc.(a) Distributes electronic components 5,900 112,100
OTHER TECHNOLOGY - 4.9%
Imation Corp.(a) Data storage products 4,900 121,581
PSC Inc.(a) Bar coding equipment 9,500 93,219
------------
214,800
------------
TOTAL TECHNOLOGY 381,888
OTHER - 1.7%
SPACEHAB, Inc.(a) Lab & supply modules 14,600 74,825
------------
TOTAL COMMON STOCKS - 96.0%
(Cost $4,282,525) 4,223,966
MONEY MARKET INSTRUMENTS(b)
Yield 4.825% to 4.890%
due November 1999 to April 2000
General Mills, Inc. ($10,102 Par Value) 10,102
Wisconsin Corp. Credit Union ($180,000 Par Value) 180,000
------------
TOTAL MONEY MARKET INSTRUMENTS - 4.3%
(Cost: $190,102) 190,102
------------
TOTAL INVESTMENTS - 100.3%
(Cost $4,472,627) 4,414,068
LIABILITIES LESS OTHER ASSETS - (0.3%) (11,745)
------------
NET ASSETS - 100.0% $ 4,402,323
------------
------------
</TABLE>
(a) Non-income producing security.
(b) Variable rate demand notes. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on June 30, 1999.
Based on cost of investments for federal income tax purposes of $4,472,627 on
June 30, 1999, net unrealized depreciation was $58,559, consisting of gross
unrealized appreciation of $628,594 and gross unrealized depreciation of
$687,153
See accompanying notes to financial statements.
8 SEMI-ANNUAL REPORT - JUNE 30, 1999
<PAGE>
STATEMENT of Assets & Liabilities as of June 30, 1999 (unaudited)
- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $4,472,627) $ 4,414,068
Receivable for:
Securities sold $86,603
Dividends and interest 3,897
-------
90,500
Organization costs (net of accumulated
amortization of $15,227) 32,053
-----------
Total assets 4,536,621
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $85,286
Fund shares redeemed 7,904
Comprehensive management fee 4,260
Organization costs 36,848 134,298
------- -----------
Net assets applicable to shares
outstanding $ 4,402,323
-----------
-----------
Shares outstanding--no par value
(unlimited number of shares
authorized) 529,231
-----------
-----------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 8.32
-----------
-----------
ANALYSIS OF NET ASSETS
Paid-in capital $ 6,193,885
Accumulated net realized loss on sales
of investments (1,721,025)
Unrealized net depreciation of
investments (58,559)
Accumulated net investment loss (11,978)
-----------
Net assets applicable to shares
outstanding $ 4,402,323
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1999 9
<PAGE>
STATEMENT of Operations Six Months Ended June 30, 1999 (unaudited)
- ------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 19,773
Interest 4,743
-----------
Total investment income 24,516
Expenses:
Comprehensive management fee 31,416
Fees to unafilliated trustees 6,013
Amortization of organization costs 4,795
-----------
Total expenses 42,224
Expense reimbursement by advisor (5,730)
-----------
Total expenses absorbed by the Fund 36,494
-----------
Net investment loss (11,978)
Net realized and unrealized gain (loss) on
investments:
Net realized loss on sales of investments (966,416)
Net change in unrealized appreciation
(depreciation) 1,630,751
-----------
Net realized and unrealized gain on investments 664,335
-----------
Net increase in net assets resulting from
operations $ 652,357
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
10 SEMI-ANNUAL REPORT - JUNE 30, 1999
<PAGE>
STATEMENTS of Changes in Net Assets
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended 6/30/99 Year Ended
(unaudited) 12/31/98
------------- -------------
<S> <C> <C>
From operations:
Net investment loss $ (11,978) $ (68,708)
Net realized loss on sales of
investments (966,416) (754,608)
Net change in unrealized appreciation
(depreciation) 1,630,751 (1,700,480)
------------- -------------
Net increase (decrease) in net assets
resulting from operations 652,357 (2,523,796)
From fund share transactions:
Proceeds from fund shares sold 535,279 6,055,498
Payments for fund shares redeemed (1,983,129) (3,086,403)
------------- -------------
Net (decrease) increase in net assets
resulting from share transactions (1,447,850) 2,969,095
------------- -------------
Total (decrease) increase in net assets (795,493) 445,299
Net assets at beginning of period 5,197,816 4,752,517
------------- -------------
Net assets at end of period $ 4,402,323 $ 5,197,816
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
SEMI-ANNUAL REPORT - JUNE 30, 1999 11
<PAGE>
FINANCIAL Highlights
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended For the period
6/30/99 Year Ended 12/15/97(a) to
(Unaudited) 12/31/98 12/31/97
<S> <C> <C> <C>
--------------------------------------------
Net asset value at beginning of period $ 7.16 $10.00 $10.00
---------- ---------- -------
Income from investment operations
Net investment loss (0.05) (0.09) 0.00
Net realized and unrealized gain
(loss) on investments 1.21 (2.75) 0.00
---------- ---------- -------
Total from investment operations 1.16 (2.84) 0.00
---------- ---------- -------
Net asset value at end of period $ 8.32 $ 7.16 $10.00
---------- ---------- -------
---------- ---------- -------
Total Return 16.20%(d) (28.40%) 0.00%(b)
Ratios/Supplemental Data
Ratio of expenses to average net
assets:
Before expense reimbursement 2.02%(c) 1.84% 1.71%(c)
After expense reimbursement 1.75%(c) 1.75% 1.71%(c)
Ratio of net investment loss to
average net assets:
Before expense reimbursement (0.85%)(c) (1.14%) (0.29%)(c)
After expense reimbursement (0.57%)(c) (1.05%) (0.29%)(c)
Portfolio turnover rate 77%(c) 80% 0%(c)
Net assets, end of period (in
thousands) $ 4,402 $5,198 $4,753
---------- ---------- -------
---------- ---------- -------
</TABLE>
(a) Commencement of operations.
(b) For the period December 15, 1997 to December 31, 1997.
(c) Ratios have been determined on an annualized basis.
(d) For the six months ended June 30, 1999.
See accompanying notes to financial statements.
12 SEMI-ANNUAL REPORT - JUNE 30, 1999
<PAGE>
- -NOTES to Financial Statements (unaudited)
- ------------------------------------------------------------------------
Skyline Funds is an open-end, diversified investment management company which
consists of Special Equities Portfolio, Small Cap Value Plus (formerly Special
Equities II), and Small Cap Contrarian. The Funds commenced public offering of
their shares as follows: Special Equities Portfolio on April 23, 1987, Small Cap
Value Plus on February 9, 1993, and Small Cap Contrarian on December 15, 1997.
The following notes relate solely to the accompanying financial statements of
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 market valuations provided by an
independent pricing service. Variable rate demand notes with sixty days or less
to maturity are valued at amortized cost which approximates market value.
Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
/ / SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on an accrual basis and includes amortization of premium and discount on money
market instruments. Realized gains and losses from security transactions are
reported on an identified cost basis.
/ / FUND SHARE VALUATION - Fund shares are sold and redeemed on a continuous
basis at net asset value. Net asset value per share is determined as of the
close of regular session trading on the New York Stock Exchange (normally 3:00
p.m. Central time), each day that the Exchange is open for trading. The net
asset value per share is determined by dividing the value of all securities and
other assets, less liabilities, by the number of shares of the Fund outstanding.
/ / FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund's policy to comply with the special provisions of the Internal Revenue
Code applicable to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income to shareholders. Such
provisions were complied with and, therefore, no federal income taxes have been
accrued.
As of December 31, 1998, the Fund had capital loss carryforwards of $754,608.
This loss may be used to offset future gains arising in tax years through 2006.
SEMI-ANNUAL REPORT - JUNE 30, 1999 13
<PAGE>
- -NOTES to Financial Statements (continued, unaudited)
- ------------------------------------------------------------------------
Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date. Dividends are determined in accordance with tax principles
which may treat certain transactions differently from generally accepted
accounting principles.
/ / EXPENSES - Expenses arising in connection with a particular fund are
allocated to that fund. Other expenses of the Skyline Funds, such as trustees'
fees, are allocated among the three funds comprising Skyline Funds.
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 period ended June 30, 1999 was $31,416. 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. For the
period ended June 30, 1999 the Adviser reimbursed the Fund $5,730.
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 ended June 30, 1999, the Fund paid fees of $6,013 to its
unaffiliated trustees.
In connection with the organization of the Fund, organizational costs of $47,280
were advanced to the Fund by the Adviser. This expense is being amortized on a
straight line basis through December 15, 2002. The Fund will reimburse the
Adviser for such expenses in equal installments without interest over 20
calendar quarters.
14 SEMI-ANNUAL REPORT - JUNE 30, 1999
<PAGE>
- ------------------------------------------------------------------------
3
FUND SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statements of changes in net assets
were as follows:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
6/30/99 12/31/98
------------------------
<S> <C> <C>
Shares sold 71,185 657,971
Less shares redeemed (267,824) (407,139)
------------ ----------
Net (decrease) increase in shares
outstanding (196,639) 250,832
------------ ----------
------------ ----------
Paid-In-Capital $6,193,885 $7,641,734
------------ ----------
------------ ----------
</TABLE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the period
ended June 30, 1999, were as follows:
<TABLE>
<S> <C>
Cost of purchases $ 1,599,355
Proceeds from sales 3,165,707
</TABLE>
- - REPORT for the Six Months Ended June 30, 1999
- ---------------------------------------------
This report, including the unaudited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
SEMI-ANNUAL REPORT - JUNE 30, 1999 15
<PAGE>
For 24-hour account information CALL: 1.800.828.2SKY
(1.800.828.2759)
To speak with a Skyline Funds Representative during
normal business hours CALL: 1.800.828.2SKY and press 0 when prompted.
- ------------------------------------------------
[SKYLINE FUNDS LOGO]
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
