<PAGE>
ANNUAL REPORT -- December 31, 1998
SKYLINE SMALL CAP
CONTRARIAN
Skyline Special Equities Portfolio
Skyline Small Cap Value Plus
Skyline Small Cap Contrarian
[SKYLINE FUNDS LOGO]
<PAGE>
- - LETTER from Daren C. Heitman, Portfolio Manager:(1)
- ---------------------------------------------
December 31, 1998
Dear Shareholder:
OVERVIEW
The Fund showed a gain of 1.13% in the fourth quarter, and for the year, the
Fund showed a loss of 28.40%. The Russell 2000 Index delivered a gain of 16.31%
for the fourth quarter and showed a loss of 2.55% for the year.
MARKET REVIEW
The big news of 1998 was the dominant performance of large company stocks
compared to small company stocks. The S&P 500 Index showed a gain of 28.76% for
the year compared to a loss of 2.55% for the Russell 2000 Index. This is the
greatest disparity in performance between large and small company stocks since
the Russell 2000 Index was created in 1979 and is likely one of the largest in
the history of the stock market. Performance was directly correlated to size in
1998 as, even within the S&P 500 Index, the larger companies did better than the
smaller companies. Interestingly, while the S&P 500 Index gained almost 30% for
the year, the majority of stocks on the New York Stock Exchange showed a loss
for the year.
The difference in performance in 1998 between large and small company stocks is
explained by changes in their price/earnings multiples, as profit growth appears
to have been about the same for each sector. With long-term interest rates
declining from about 6% to 5% during the year, the P/E multiple of the S&P 500
Index increased nearly 30% and the P/E multiple of the Russell 2000 Index
declined about 10%. It is highly unusual for such a major valuation diversion to
occur. Most stock market observers attribute it to investors' desire for safety
and liquidity during a time of international financial problems and fears of
worldwide recession. Also, the increasing popularity of indexing techniques
enhanced the returns of large cap stocks. While investors favored large cap
stocks during 1998 for these reasons, we believe a terrific opportunity for
small cap stocks has been created since they are at extraordinarily low relative
valuation levels.
While the Russell 2000 Index ended the year nearly unchanged, there was enormous
volatility during the year. Small stocks began the year with a nice advance,
only to fall nearly 40% from their peak in April to their trough in early
October. The subsequent rally, aided by three interest rate cuts by the Federal
Reserve Board, nearly brought the Index back to even. This volatility was caused
by two key problems. First, investors became very nervous about overseas
problems in Asia, Latin America, and Russia. Second, U.S. companies began
experiencing profit deterioration in the middle of the year.
Within the small cap market, growth stock investors showed better returns than
value investors for both the fourth quarter and the year. Growth stock investors
were helped by superior returns in technology, health care, and consumer stocks,
areas in which they tend to focus. Value investors were hurt by sub-par returns
in financial, energy,
ANNUAL REPORT - DECEMBER 31, 1998 1
<PAGE>
and economically sensitive stocks. While economic statistics indicate that the
economy is healthy, economic weakness showed up in the industrial side of the
economy and in the energy sector, hurting stock returns in those areas. Though
pockets of the economy remain strong, such as the consumer area, overall
economic growth has somewhat moderated over the past year. In general, a
slowdown in economic growth causes problems for value-oriented investors.
PORTFOLIO REVIEW
We are very disappointed with the performance of the Fund in 1998. While the
external environment clearly created headwind for our contrarian style, the
degree of underperformance also required us to look internally for answers. We
believe two issues contributed to the poor performance and we have made
adjustments to address them. Most importantly, we emerged from this analysis
committed as ever to the underlying strategy and any adjustments we make will
not change the fundamental characteristics of the Fund.
Issue number one was a lack of companies reporting improvements in their
fundamentals. We began the year with a portfolio of companies with poor business
trends, and very few of them showed a meaningful improvement as the year
progressed. This should correct itself partially with the passage of time, as we
believe many of the companies we originally chose for the Fund will recover. In
addition, we are also proactively adding new stocks with better near-term
business trends to inject some momentum into the Fund. These new companies still
have contrarian attributes; they are simply further into their turnarounds than
the companies we originally purchased.
The second issue relates to diversification. In 1998, the stocks of small
companies with poor business trends were highly correlated due to the external
environment. This correlation worked to the disadvantage of the Fund's
performance. We owned very small companies with strong value characteristics in
a market where investors wanted large companies with growth characteristics.
Making matters worse, our contrarian instincts drew us to troubled companies in
an environment where investors seemed to want only companies with strong near
term outlooks, regardless of valuation. While the Fund will always be a
small-cap, contrarian fund, we can diversify within this category of stocks to
minimize the chance of repeating 1998's performance. For example, we can move
away from the micro-cap bias currently imbedded in the Fund by investing in
companies with higher market capitalizations. The adjustment outlined in the
preceding paragraph addresses this diversification goal.
OUTLOOK
In our opinion, a strong economy is the best catalyst for improving stock prices
in the Fund. The Federal Reserve Board and central banks around the world are
lowering interest rates to generate better economic growth. If they are
successful, it should create a better environment for the companies in the Fund
to show an improvement in their earnings. Also, it would likely improve investor
confidence, a necessary condition in order to improve the valuation of small cap
stocks in general. The Fund's deep value orientation should provide attractive
leverage to these potential changes in the environment.
2 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
Our only reservation is about near-term performance. This is because certain
segments of the stock market appear to be at inflated levels, particularly large
cap growth stocks and certain technology stocks. If these segments of the market
decline significantly, the Fund will very likely decline also. However, we are
extremely optimistic about performance over the long term because the valuation
of the Fund today is so compelling relative to large cap stocks, current
interest rates, and the potential earnings of the companies in the Fund.
Despite the rough inaugural year, we are still confident our contrarian style
can deliver strong results, particularly over a long time frame. The most
positive factor is the attractive absolute valuation of the Fund. As mentioned
in the past, the Fund's extremely low price/book value ratio gives it enormous
leverage to a turnaround in the underlying companies' results. We believe, with
time, more and more of the companies in the Fund will achieve this turnaround.
/s/ Daren Heitman
- - PORTFOLIO Characteristics(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
CONTRARIAN RUSSELL 2000 S&P 500
<S> <C> <C> <C>
PRICE/BOOK 0.92 2.53 4.87
PRICE/SALES 0.46 1.30 2.02
P/E RATIO (MEDIAN) 14.3 20.0 24.6
- -----------------------------------------------------------------------------
EPS GROWTH--5 YRS (HISTORICAL) 5.0% 16.6% 17.2%
EPS GROWTH--1 YR (FORECASTED) 15.6% 18.6% 12.2%
- -----------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $130 million $750 million $60 billion
PORTFOLIO VALUE $5.2 million $855 billion $9,907 billion
NUMBER OF HOLDINGS 41 1,932 500
- -----------------------------------------------------------------------------
CUSIP #: 830833604
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
NET ASSET VALUE (PER SHARE): $7.16
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1998 3
<PAGE>
- - PERFORMANCE (%)(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
CALENDAR
4Q SINCE YEAR
1998 1998 INCEPTION(2) 1997(2)
<S> <C> <C> <C> <C>
SMALL CAP CONTRARIAN 1.13 -28.40 -27.33 0.00
RUSSELL 2000 16.31 -2.55 1.21 3.91
S&P 500 21.31 28.76 28.29 0.80
</TABLE>
- - SECTOR Weightings (as of December 31, 1998)
- -----------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Consumer Discretionary 28.3%
Energy 4.2%
Financial Services 11.8%
Health Care 12.0%
Materials & Processing 13.2%
Other 3.0%
Producer Durables 7.6%
Technology 11.0%
Cash 1.4%
Autos & Transportation 7.5%
</TABLE>
4 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - TOP Ten Holdings(3)
<TABLE>
<CAPTION>
% OF NET ASSETS
- -----------------------------------------------------------------------------
<S> <C>
CORAM HEALTHCARE CORP.
Home infusion services 3.8%
IMATION CORP.
Data storage products 3.4%
SENSORMATIC ELECTRONICS CORP.
Anti-theft devices 3.2%
WILLBROS GROUP, INC.
Engineering/construction firm 3.2%
SMARTFLEX SYSTEMS, INC.
Flexible circuit assembler 3.2%
CLINTRIALS RESEARCH INC.
Contract research firm 3.2%
RIGHT MGMT CONSULTANTS
Outplacement & HR services 3.1%
INTERTAN, INC.
Consumer electronics retailer 3.0%
QUEST DIAGNOSTICS INC.
Diagnostic testing services 3.0%
SPACEHAB, INC.
Lab & supply modules 3.0%
TOP TEN HOLDINGS 32.1%
</TABLE>
- - SECTOR Performance (as of December 31, 1998)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
4Q 1998 YTD 1998
- ----------------------------------------------------- -----------------------------------------------------
SMALL CAP RUSSELL SMALL CAP RUSSELL
CONTRARIAN 2000 CONTRARIAN 2000
<S> <C> <C> <C> <C> <C>
Other 19.9% 14.8% Consumer Staples 91.8% 1.3%
- ----------------------------------------------------- -----------------------------------------------------
Producer Durables 9.2 19.9 Other -1.0 -16.0
- ----------------------------------------------------- -----------------------------------------------------
Technology 8.3 32.9 Consumer Discretionary -6.4 3.8
- ----------------------------------------------------- -----------------------------------------------------
Financial Services 6.0 6.3 Autos & Transportation -15.7 1.1
- ----------------------------------------------------- -----------------------------------------------------
Health Care 2.8 27.0 Financial Services -19.0 -7.2
- ----------------------------------------------------- -----------------------------------------------------
Consumer Discretionary 2.6 21.4 Health Care -25.3 3.3
- ----------------------------------------------------- -----------------------------------------------------
Autos & Transportation -0.3 23.9 Producer Durables -29.4 -7.2
- ----------------------------------------------------- -----------------------------------------------------
Materials & Processing -4.1 10.2 Technology -42.0 12.8
- ----------------------------------------------------- -----------------------------------------------------
Energy -28.3 -15.5 Materials & Processing -54.7 -12.3
- ----------------------------------------------------- -----------------------------------------------------
Utilities N/A* 12.5 Energy -59.1 -49.6
- ----------------------------------------------------- -----------------------------------------------------
Consumer Staples N/A* 14.8 Utilities N/A* 12.1
- ----------------------------------------------------- -----------------------------------------------------
</TABLE>
* NOT APPLICABLE
ANNUAL REPORT - DECEMBER 31, 1998 5
<PAGE>
- - STOCK Highlights(3)
- ---------------------------------------------
SMARTFLEX SYSTEMS, INC. (SFLX)
SFLX is a contract manufacturer that specializes in attaching semiconductors to
flexible circuits. This skill is especially valuable to hard disk drive
manufacturers, who account for 60% of SFLX's sales. Despite a very severe
downturn in the hard disk drive industry, SFLX remained profitable and had
positive cash flow throughout 1998 due to a significant improvement in its cost
structure. When the inevitable recovery occurs, SFLX is poised to improve
dramatically on its prior EPS record of $1.12 per share. Despite a bright
long-term outlook, SFLX shares were purchased at an average cost of $ 8.75 per
share, near book value and just two times SFLX's net cash level.
WELLMAN, INC. (WLM)
WLM is a specialty chemicals company that manufactures two products, polyester
fibers and PET resins. Polyester fibers are used mostly in apparel and home
furnishings, while PET resins primarily end up as beverage containers and food
packaging. Though WLM's end markets are growing only modestly, WLM has
successfully increased its market share over the years. Earnings have ranged
from $0.81 to $2.20 per share during the past 10 years, with an average of $1.52
per share. After a major expansion, to be completed in 1999, WLM's earnings
power should exceed $3.00 per share. The shares were purchased at nearly $10 per
share, which represents roughly 50% of book value and a very low multiple of its
normal EPS.
- - CHANGE in Value of a $10,000 Investment(1)
- ---------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT SINCE INCEPTION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SMALL CAP RUSSELL S&P
<S> <C> <C> <C>
Contrarian 2000 500
Initial Investment $10,000 $10,000 $10,000
1997 $10,000 $10,391 $10,080
1998 $7,160 $10,126 $12,748
</TABLE>
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at the end of this section.
6 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
NOTES TO PERFORMANCE
(1) The performance for the year ended December 31, 1998, and for period
December 15, 1997 (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
portfolio 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, 1998 7
<PAGE>
- - PORTFOLIO Holdings as of December 31, 1998
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY NUMBER MARKET
DESCRIPTION OF SHARES VALUE
----------------------------------- --------- ------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 7.5%
OTHER TRANSPORTATION - 7.5%
Kitty Hawk, Inc.(a) Air freight services 13,600 $ 149,600
Mesa Air Group, Inc.(a) Regional airline 15,100 117,969
Trailer Bridge, Inc.(a) Marine transportation 78,800 120,662
------------
388,231
CONSUMER DISCRETIONARY - 28.3%
COMMERCIAL SERVICES - 16.3%
Angelica Corp. Textile rental services 8,200 152,725
DIMON Inc. Tobacco leaf wholesaler 19,900 148,006
Insurance Auto Auctions(a) Auto salvage 11,000 130,625
LESCO, Inc. Lawn care products 8,300 106,863
Right Mgmt Consultants(a) Outplacement & HR services 10,900 160,775
Unisource Worldwide, Inc. Paper/shipping supplies 20,500 148,625
------------
847,619
CONSUMER PRODUCTS/SERVICES - 6.0%
Drypers Corp.(a) Makes disposable diapers 39,900 129,675
LADD Furniture, Inc.(a) Furniture manufacturer 8,100 131,119
Singer Company N.V. (The)(a) Consumer durables 13,200 51,975
------------
312,769
RETAIL - 6.0%
Discount Auto Parts, Inc.(a) Auto parts stores 3,200 70,200
InterTAN, Inc.(a) Consumer electronics retailer 27,200 158,100
Lechters, Inc.(a) Housewares chain 32,700 80,728
------------
309,028
------------
TOTAL CONSUMER DISCRETIONARY 1,469,416
ENERGY - 4.2%
EXPLORATION & PRODUCTION - 1.0%
Comstock Resources, Inc.(a) Oil & gas producer 17,200 52,675
OTHER ENERGY - 3.2%
Willbros Group, Inc.(a) Engineering/construction 30,200 167,988
------------
TOTAL ENERGY 220,663
FINANCIAL SERVICES - 11.8%
INSURANCE - 7.4%
GAINSCO, INC. P&C insurance 15,400 94,325
Highlands Insurance Group, Inc.(a) P&C insurance 11,000 143,687
Navigators Group, Inc. (The)(a) P&C insurance 9,300 144,150
------------
382,162
</TABLE>
8 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY NUMBER MARKET
DESCRIPTION OF SHARES VALUE
----------------------------------- --------- ------------
<S> <C> <C> <C>
OTHER FINANCIAL SERVICES - 4.4%
American Capital Strategies, Ltd. Commercial finance 5,900 $ 101,775
Credit Acceptance Corp.(a) Automobile finance services 17,800 130,163
------------
231,938
------------
TOTAL FINANCIAL SERVICES 614,100
HEALTH CARE - 12.0%
HEALTH CARE SERVICES - 10.0%
ClinTrials Research Inc.(a) Contract research firm 42,000 165,375
Coram Healthcare Corp.(a) Home infusion services 104,500 195,937
Quest Diagnostics Inc.(a) Diagnostic testing services 8,800 156,750
------------
518,062
MEDICAL EQUIPMENT/PRODUCTS - 2.0%
Allied Healthcare Products, Inc.(a) Makes respiratory products 65,100 105,788
------------
TOTAL HEALTH CARE 623,850
MATERIALS & PROCESSING - 13.2%
BUILDING/CONSTRUCTION PRODUCTS - 1.2%
American Residential(a) HVAC repair services 19,200 62,400
INDUSTRIAL PRODUCTS - 2.9%
Global Industrial Tech.(a) Conglomerate 14,200 151,762
METAL FABRICATIONS - 5.3%
Atchison Casting Corp.(a) Steel & iron castings 12,700 117,475
Citation Corp.(a) Castings manufacturer 12,200 154,025
------------
271,500
SPECIALTY CHEMICALS - 1.4%
Wellman, Inc. PET resins/polyester fibers 7,400 75,387
STEEL/IRON - 2.4%
Birmingham Steel Corp.(a) Steel mini-mill 30,000 125,625
------------
TOTAL MATERIALS & PROCESSING 686,674
PRODUCER DURABLES - 7.6%
CAPITAL GOODS - 0.2%
Kennametal Inc. Metal-cutting tools 400 8,500
ELECTRICAL EQUIPMENT/PRODUCTS - 3.2%
Sensormatic Electronics Corp.(a) Anti-theft devices 24,300 168,581
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1998 9
<PAGE>
- - PORTFOLIO Holdings as of December 31, 1998 (continued)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY NUMBER MARKET
DESCRIPTION OF SHARES VALUE
----------------------------------- --------- ------------
<S> <C> <C> <C>
MACHINERY - 4.2%
Brown & Sharpe Manufacturing Metrology instruments 11,900 $ 95,200
DT Industries, Inc. Packaging equipment 7,700 121,275
------------
216,475
------------
TOTAL PRODUCER DURABLES 393,556
TECHNOLOGY - 11.0%
CONTRACT MANUFACTURING - 3.2%
Smartflex Systems, Inc.(a) Flexible circuit assembler 23,100 167,475
OTHER TECHNOLOGY - 7.8%
GENICOM Corp.(a) Computer support services 34,600 76,769
Imation Corp.(a) Data storage products 10,000 175,000
PSC Inc.(a) Bar coding equipment 16,300 154,850
------------
406,619
------------
TOTAL TECHNOLOGY 574,094
OTHER - 3.0%
SPACEHAB, Inc.(a) Lab & supply modules 14,800 155,400
------------
TOTAL COMMON STOCKS - 98.6%
(Cost $6,815,294) 5,125,984
MONEY MARKET INSTRUMENTS(b)
Yield 5.23% to 5.30%
due July 1999
Sara Lee Corp. 34,247
Wisconsin Corp. Credit Union 106,970
------------
TOTAL MONEY MARKET INSTRUMENTS - 2.7%
(Cost: $141,217) 141,217
------------
TOTAL INVESTMENTS - 101.3%
(Cost $6,956,511) 5,267,201
OTHER LIABILITIES LESS ASSETS - (1.3%) (69,385)
------------
NET ASSETS - 100.0% $ 5,197,816
------------
------------
</TABLE>
(a) Non-income producing security.
(b) Variable rate demand notes. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on December 31, 1998. Based on cost of
investments.
Based on cost of investments for federal income tax purposes of $6,956,511 on
December 31, 1998, net unrealized depreciation was $1,689,310, consisting of
gross unrealized appreciation of $205,532 and gross unrealized depreciation of
$1,894,842
See accompanying notes to financial statements.
10 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - STATEMENT of Assets & Liabilities as of December 31, 1998
- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $6,956,511) $ 5,267,201
Receivable for:
Securities sold $129,436
Dividends and interest 3,169
Shares sold 12,100
Due from Adviser 659 145,364
--------
Organization costs, net of accumulated
amortization of $10,432 36,848
-----------
Total assets 5,449,413
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $196,740
Shares redeemed 10,683
Comprehensive management fee 7,326
Organization costs 36,848 251,597
-------- -----------
Net assets applicable to shares
outstanding $ 5,197,816
-----------
-----------
Shares outstanding--no par value
(unlimited number of shares
authorized) 725,870
-----------
-----------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 7.16
-----------
-----------
ANALYSIS OF NET ASSETS
Paid-in capital $ 7,641,734
Undistributed net realized loss on sales
of investments (754,608)
Unrealized depreciation of investments (1,689,310)
-----------
Net assets applicable to shares
outstanding $ 5,197,816
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1998 11
<PAGE>
- - STATEMENT of Operations Year Ended December 31, 1998
- ------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 21,772
Interest 23,953
-----------
Total investment income 45,725
Expenses:
Comprehensive management fee 98,075
Fees to unafilliated trustees 12,152
Amortization of organization costs 9,994
-----------
Total expenses 120,221
Less expense reimbursement by Adviser (5,788)
-----------
Total expenses absorbed by the Fund 114,433
-----------
Net investment loss (68,708)
Net realized and unrealized loss on investments:
Net realized loss on sales of investments (754,608)
Net change in unrealized appreciation (1,700,480)
-----------
Net realized and unrealized loss on investments (2,455,088)
-----------
Net decrease in net assets resulting from
operations $(2,523,796)
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - STATEMENTS of Changes in Net Assets
- ---------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FOR THE PERIOD
12/31/98 12/15/97(a) - 12/31/97
------------ ----------------------
<S> <C> <C>
From operations:
Net investment loss $ (68,708) $ (544)
Net realized loss on sales of
investments (754,608) --
Net change in unrealized appreciation (1,700,480) 11,170
------------- ------------
Net (decrease) increase in net assets
resulting from operations (2,523,796) 10,626
From share transactions:
Proceeds from shares sold 6,055,498 4,743,861
Payments for shares redeemed (3,086,403) (1,970)
------------- ------------
Net increase in net assets resulting
from share transactions 2,969,095 4,741,891
------------- ------------
Total increase in net assets 445,299 4,752,517
Net assets at beginning of period 4,752,517 --
------------- ------------
Net assets at end of period $5,197,816 $4,752,517
------------- ------------
------------- ------------
</TABLE>
(a) Commencement of operations.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1998 13
<PAGE>
- - FINANCIAL Highlights
- ---------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED 12/15/97(a) TO
12/31/98 12/31/97
<S> <C> <C>
----------------------------
Net asset value at beginning of period $ 10.00 $ 10.00
---------- -------
Income from investment operations
Net investment loss (0.09) 0.00
Net realized and unrealized loss on
investments (2.75) 0.00
---------- -------
Total from investment operations (2.84) 0.00
---------- -------
Net asset value at end of period $ 7.16 $ 10.00
---------- -------
---------- -------
Total Return (28.40%) 0.00%(b)
Ratios/Supplemental Data
Ratio of expenses to average net
assets:
Before expense reimbursement 1.84% 1.71%(c)
After expense reimbursement 1.75% 1.71%(c)
Ratio of net investment loss to
average net assets:
Before expense reimbursement (1.14%) (0.29%)(c)
After expense reimbursement (1.05%) (0.29%)(c)
Portfolio turnover rate 80% 0%(c)
Net assets, end of period (in
thousands) $ 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.
See accompanying notes to financial statements.
14 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- -NOTES to Financial Statements
- ---------------------------------------------
Skyline Funds is an open-end, diversified investment management company which
consists of Special Equities Portfolio, Small Cap Value Plus (formerly Special
Equities II), and Small Cap Contrarian. The Funds commenced public offering of
their shares as follows: Special Equities Portfolio on April 23, 1987, Small Cap
Value Plus on February 9, 1993, and Small Cap Contrarian on December 15, 1997.
The following notes relate solely to the accompanying financial statements of
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 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.
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.
ANNUAL REPORT - DECEMBER 31, 1998 15
<PAGE>
- -NOTES to Financial Statements (continued)
- ------------------------------------------------------------------------
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 Fund are allocated to that
Fund. Other Skyline Funds' expenses, such as trustees' fees, are allocated among
the three 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 year ended December 31, 1998 was $98,075. 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
year ended December 31, 1998 the Adviser reimbursed the Fund $5,788.
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, 1998, the Fund paid fees of $12,152 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.
16 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- ------------------------------------------------------------------------
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statements of changes in net assets
were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED 12/15/97 TO
12/31/98 12/31/97
-----------------------------
<S> <C> <C>
Shares sold 657,971 475,238
Less shares redeemed (407,139) (200)
----------- ----------------
Net increase in shares outstanding 250,832 475,038
----------- ----------------
----------- ----------------
</TABLE>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1998, were as follows:
<TABLE>
<S> <C>
Cost of purchases $ 8,114,979
Proceeds from sales 4,787,726
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1998 17
<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,
1998, 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 the year then ended and 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 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, 1998, 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 Small Cap Contrarian at December 31, 1998, 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 the year then ended
and for the period December 15, 1997 to December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 25, 1999
18 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - REPORT of Results of Shareholder Meeting
- ---------------------------------------------
On August 28, 1998, Skyline Funds held a Special Meeting of Shareholders at
which the Fund's shareholders approved a new investment advisory agreement
between the Fund and Skyline Asset Management, L.P. (the "Adviser") without any
substantive changes from the agreement with the Adviser that existed prior to
the Special Meeting and elected Richard K. Pearson to the Board of Trustees. The
members of the Board of Trustees who continued in office after the meeting are
William L. Achenbach, William M. Dutton, Paul J. Finnegan and David A. Martin.
The holders of the majority of the outstanding shares of the Fund approved the
new investment advisory agreement by the votes shown below:
<TABLE>
<S> <C>
For 395,421
Against 3,960
Abstain 7,007
Total 406,388
</TABLE>
The holders of the majority of the shares of all Funds voting together elected
Mr. Pearson to the Board of Trustees by the votes shown below:
<TABLE>
<S> <C>
For 23,261,507
Withheld 511,956
Total 23,773,463
</TABLE>
- - REPORT for the Year Ended December 31, 1998
- ---------------------------------------------
This report, including the audited 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.
ANNUAL REPORT - DECEMBER 31, 1998 19
<PAGE>
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20 ANNUAL REPORT - DECEMBER 31, 1998
<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
