<PAGE>
ANNUAL REPORT -- December 31, 1998
SKYLINE SMALL CAP VALUE PLUS
Skyline Special Equities Portfolio
Skyline Small Cap Value Plus
Skyline Small Cap Contrarian
[SKYLINE FUNDS LOGO]
<PAGE>
- - LETTER from Kenneth S. Kailin, Portfolio Manager:(1)
- ---------------------------------------------
December 31, 1998
Dear Shareholder:
OVERVIEW
The Fund showed a gain of 8.19% in the fourth quarter, as the stock market moved
up strongly from its depressed level in September. For the year, the Fund
declined 6.66% due to weak results in the second and third quarters of 1998. 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 did for both the fourth quarter and the year. Growth stock
investors were
ANNUAL REPORT - DECEMBER 31, 1998 1
<PAGE>
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, 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 moderated over the past year. In
general, a slowdown in economic growth causes problems for value-oriented
investors.
PORTFOLIO REVIEW
The Fund's performance, while up 8.19% in the fourth quarter, did lag our
benchmark as value stocks were out of favor. For the year, the Fund was down
6.66% as small cap stocks declined in the Fall period. The first quarter of 1998
got off to a fast start with strong positive double-digit returns for the Fund.
Corporate earnings were strong and investors felt Asian economic woes would not
meaningfully impact U.S. companies. The Fund had good stock selections and
industry weightings in consumer discretionary, health care, and financial
stocks. Thus the Fund outperformed key benchmarks in the first quarter. However,
beginning in the second quarter, corporate profits began to slow and earnings
started falling short of investor expectations. Results began to slide
accordingly and the Fund's returns modestly lagged key benchmarks. In the third
quarter, weakening corporate profits combined with fears of economic meltdowns
around the world led investors to run from small cap stocks. Performance results
for the Fund were slightly better than key benchmarks in the very difficult
third period. In the fourth quarter, stocks came roaring back, but small cap
value names generally did not keep pace, causing the Fund to rise moderately and
lag the Russell 2000 Index for both the final quarter and the year.
Consumer discretionary and financial services stocks were the most heavily
weighted sectors in the Fund for both the fourth quarter and the year.
Consumer-related stock holdings were increased during the course of the year as
consumer spending trends appeared solid and numerous companies that possessed
the combination of good growth prospects and low valuation were uncovered. The
Fund's performance in this important sector was positive, but only modestly for
the fourth quarter and saw single digit declines over the 12-month period.
Investor fears regarding possible weak holiday shopping held back the
performance of many retail and apparel stocks. In addition, clouded corporate
announcements regarding near-term profit outlook hurt several of the Fund's
consumer stocks in the fourth quarter. Thus both the heavy stock weighting and
sub-par stock selection held back performance. However, we still believe the
consumer discretionary sector is healthy and our stocks hold exciting prospects.
Financial service stocks accounted for over 25% of the Fund at year-end. The
combination of solid profit growth outlooks and very reasonable valuations were
plentiful in this sector. Returns, however, for this area in the fourth quarter
were also only modestly positive and over the 12-month period produced single
digit declines. This decline was surprising considering the low levels of
inflation, reasonable loan
2 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
demand, and a backdrop of multiple interest rate cuts by the Federal Reserve.
Based on good growth outlooks and low valuations these stocks appear very
compelling at the present time.
Technology issues represented about 15% of the Fund at the end of the quarter
and were strong performers in the quarter, with the Fund's holdings returning
over 25%. A number of these stocks rebounded strongly from deep drops in the
third quarter. Generally, technology firms saw business strengthen modestly
after being weak for much of the year.
OUTLOOK
As we enter 1999, the economy looks to be fragile, but growing. Capital spending
plans by businesses look weak and pricing pressures due to foreign competition
and excess capacity have continued. Corporate profit growth has slowed, and more
companies are reporting disappointments relative to expectations. Consumer
spending, however, seems healthy as jobs are plentiful, credit is easy, and low
interest rates provide re-financing and home purchasing opportunities. Since
consumer spending and Federal Reserve policies are the biggest factors for
economic growth it appears an overall slow growth environment should continue.
Domestic companies are expected to grow profits faster and carry much more
reasonable valuation levels. By historical standards the Russell 2000 Index
would have to outperform the S&P 500 Index by well over 30% to just get back to
long-term normal valuation levels. Poor performance by small company stocks
historically has been followed by an extended period of outperformance. An
investor should prefer faster growing, less expensive companies to slower
growing, very expensive companies.
At year-end, consumer discretionary stocks had the highest weighting in the Fund
relative to the Russell 2000 Index. The stocks in this sector are very diverse,
ranging from Nautica Enterprises, Inc., a well-known apparel manufacturer, to
United Stationers, Inc., a distributor of office supplies. The stocks owned by
the Fund in this sector are expected to show solid earnings growth and carry a
low valuation level relative to the Russell 2000 Index. In addition, while the
industrial environment is weak, the consumer is continuing to spend based on
strong employment trends and low interest rates.
In a slow growth environment, the ability for a company to increase profits and
not disappoint investor expectations takes on greater importance. Thus our
investment style of purchasing low expectation stocks with strong near-term
earnings growth and low valuations seems quite appropriate.
/s/ Kenneth S. Kailin
ANNUAL REPORT - DECEMBER 31, 1998 3
<PAGE>
- - PERFORMANCE (%)(1)
- -------------------------------------------------
<TABLE>
<CAPTION>
4Q
1998 1998 3 YRS. 5 YRS.
<S> <C> <C> <C> <C>
SMALL CAP VALUE PLUS 8.19 -6.66 14.25 12.18
RUSSELL 2000 16.31 -2.55 11.58 11.86
S&P 500 21.31 28.76 28.40 24.15
</TABLE>
- - SECTOR Weightings (as of December 31, 1998)
- -----------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Consumer Discretionary 28.2%
Consumer Staples 3.0%
Energy 2.1%
Financial Services 27.1%
Health Care 11.9%
Materials & Processing .8%
Producer Durables 4.8%
Technology 15.2%
Cash 3.6%
Autos & Transportation 3.3%
</TABLE>
4 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALENDAR YEARS
SINCE -----------------------------------------------------------------------
INCEPTION(2) 1998 1997 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C> <C> <C> <C>
SMALL CAP VALUE PLUS 12.05 -6.7 26.2 26.6 21.0 -1.5 10.1
RUSSELL 2000 12.41 -2.6 22.4 16.5 28.4 -1.8 13.8
S&P 500 21.59 28.8 33.4 23.3 37.5 1.3 10.0
</TABLE>
- - SECTOR Performance (as of December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q 1998 YTD 1998
- ----------------------------------------------------------------- -----------------------------------------------------------------
SMALL CAP RUSSELL SMALL CAP RUSSELL
VALUE PLUS 2000 VALUE PLUS 2000
<S> <C> <C> <C> <C> <C>
Consumer Staples 47.3% 14.8% Autos & Transportation 19.1% 1.1%
- ----------------------------------------------------------------- -----------------------------------------------------------------
Autos & Transportation 43.0 23.9 Health Care 14.4 3.3
- ----------------------------------------------------------------- -----------------------------------------------------------------
Technology 26.8 32.9 Consumer Staples 10.4 1.3
- ----------------------------------------------------------------- -----------------------------------------------------------------
Health Care 11.2 27.0 Financial Services -3.5 -7.2
- ----------------------------------------------------------------- -----------------------------------------------------------------
Financial Services 4.6 6.3 Consumer Discretionary -8.7 3.8
- ----------------------------------------------------------------- -----------------------------------------------------------------
Consumer Discretionary 2.2 21.4 Technology -11.5 12.8
- ----------------------------------------------------------------- -----------------------------------------------------------------
Producer Durables -3.9 19.9 Producer Durables -27.4 -7.2
- ----------------------------------------------------------------- -----------------------------------------------------------------
Energy -7.2 -15.5 Energy -28.9 -49.6
- ----------------------------------------------------------------- -----------------------------------------------------------------
Materials & Processing -17.7 10.2 Materials & Processing -45.9 -12.3
- ----------------------------------------------------------------- -----------------------------------------------------------------
Other NA* 14.8 Other NA* -16.0
- ----------------------------------------------------------------- -----------------------------------------------------------------
Utilities NA* 12.5 Utilities NA* 12.1
- ----------------------------------------------------------------- -----------------------------------------------------------------
</TABLE>
* NOT APPLICABLE
ANNUAL REPORT - DECEMBER 31, 1998 5
<PAGE>
- - PORTFOLIO Characteristics(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
VALUE PLUS RUSSELL 2000 S&P 500
<S> <C> <C> <C>
P/E RATIO (MEDIAN) 15.3 20.0 24.6
PRICE/BOOK 2.31 2.53 4.87
PRICE/SALES 0.95 1.30 2.02
- -------------------------------------------------------------------------------
EPS GROWTH--5 YRS 19.3% 16.6% 17.2%
(HISTORICAL)
EPS GROWTH--1 YR (FORECASTED) 16.7% 18.6% 12.2%
- -------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $840 million $750 million $60 billion
PORTFOLIO VALUE $135 million $855 billion $9,907 billion
NUMBER OF HOLDINGS 51 1,932 500
- -------------------------------------------------------------------------------
TICKER SYMBOL: SPEQX 1998 DISTRIBUTIONS (PER SHARE):
CUSIP #: 830833406 LONG-TERM CAPITAL GAIN $0.0538
INITIAL INVESTMENT: $1,000 SHORT-TERM CAPITAL GAIN $0.0561
SUBSEQUENT INVESTMENT: $100 RETURN OF CAPITAL $0.0101
NET ASSET VALUE (PER SHARE): $11.78
</TABLE>
- - TOP Ten Holdings(3)
<TABLE>
<CAPTION>
% OF NET ASSETS
- -----------------------------------------------------------------------------
<S> <C>
ANIXTER INTERNATIONAL INC.
Networking products 3.4%
ENHANCE FINANCIAL SERVICES GROUP
Specialty reinsurance 3.2%
WESLEY JESSEN VISIONCARE, INC.
Contact lenses 3.2%
CMAC INVESTMENT CORP.
Mortgage insurance 3.2%
MIDAS, INC.
Auto service centers franchiser 3.0%
ZALE CORP.
Jewelry retailer 2.7%
DII GROUP, INC.
Electronics manufacturing 2.6%
PENTAIR, INC.
Diversified manufacturer 2.6%
DENTSPLY INTERNATIONAL INC.
Dental products manufacturer 2.5%
FREMONT GENERAL CORP.
Workers' compensation insurance 2.5%
TOP TEN HOLDINGS 28.9%
</TABLE>
6 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - STOCK Highlights(3)
- ---------------------------------------------
SAFETY-KLEEN CORP. (SK)
SK is the leading hazardous and industrial waste company in the United States.
After experiencing chronic over-capacity in the 1990's, the industry is clearly
improving. SK was formed by merging four companies to become the dominant
special waste company. SK should enjoy rapid earnings growth from cost
reductions, thereby eliminating duplicative overhead and de-leveraging. SK can
rapidly pay down its debt since reported earnings are reduced by non-cash
charges and understate the cash generation of the business. Additionally, SK is
growing its revenues by increasing penetration of existing clients, as the newly
combined company is able to handle a much broader stream of wastes. Currently,
SK trades at a 30% discount to the market, and should enjoy an above 20% rate of
earnings growth for a number of years.
TRISTAR AEROSPACE (TSX)
TSX is the leader in providing just-in-time inventory management solutions to
aerospace manufacturers. TSX reduces its customers' costs through better
inventory management of fasteners. While most aerospace companies are fearful of
the anticipated declines in aircraft production, TSX believes its business will
grow as manufacturers scramble to cut costs. TSX has very limited competition
and a very low penetration of its potential customer base. TSX is expected to
grow earnings 25% in 1999, and despite these bright prospects, TSX currently
trades at a 70% discount to the market.
- - 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
VALUE PLUS 2000 500
<S> <C> <C> <C>
Initial Investment $10,000 $10,000 $10,000
1993 $11,008 $11,376 $10,732
1994 $10,841 $11,169 $10,874
1995 $13,112 $14,346 $14,953
1996 $16,599 $16,712 $18,431
1997 $20,950 $20,448 $24,582
1998 $19,555 $19,928 $31,652
</TABLE>
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at the end of this section.
ANNUAL REPORT - DECEMBER 31, 1998 7
<PAGE>
NOTES TO PERFORMANCE
(1) The performance for the one, three, and five years ended December 31, 1998,
and for the period February 9, 1993 (inception) through December 31, 1998,
is an average annual total return calculation which is described in the
Fund's prospectus. Of course, past performance is no guarantee of future
results. The principal value and return on your investment will fluctuate
and on redemption may be worth more or less than your original cost.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. The S&P 500 Index, a widely quoted stock
market index, includes 500 of the largest companies publicly traded in
America. All figures take into account reinvested dividends. All indexes and
portfolio characteristics are compiled by Frank Russell Company.
Source: Frank Russell Company.
Distributions were paid to shareholders in December of 1998.
(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 companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor Inc.
8 ANNUAL REPORT - DECEMBER 31, 1998
<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 - 3.3%
AUTO RELATED - 1.7%
Dura Automotive Systems, Inc.(a) OEM auto parts producer 68,300 $ 2,330,737
TRUCKING - 1.6%
Covenant Transport, Inc.(a) Specialty truckload carrier 122,300 2,186,113
-------------
TOTAL AUTOS & TRANSPORTATION 4,516,850
CONSUMER DISCRETIONARY - 28.2%
APPAREL/TEXTILES - 4.6%
Gildan Activewear Inc.(a) Apparel manufacturer 215,700 1,806,488
Kellwood Co. Apparel manufacturer 92,400 2,310,000
Nautica Enterprises, Inc.(a) Men's sportswear 135,800 2,037,000
-------------
6,153,488
COMMERCIAL SERVICES - 5.6%
RemedyTemp, Inc.(a) Staffing services 103,000 1,557,875
Safety-Kleen Corp.(a) Waste recycling firm 219,675 3,102,909
United Stationers Inc.(a) Office products distributor 110,200 2,865,200
-------------
7,525,984
CONSUMER PRODUCTS/SERVICES - 6.5%
Department 56, Inc.(a) Decorative collectibles 36,700 1,378,544
Kenneth Cole Productions(a) Footwear/accessories maker 173,700 3,256,875
Midas, Inc. Auto service centers franchiser 131,700 4,099,162
-------------
8,734,581
PRINTING/PUBLISHING - 2.3%
World Color Press, Inc.(a) Commercial printer 100,400 3,055,925
RETAIL - 9.2%
Claire's Stores, Inc. Fashion accessories stores 150,100 3,077,050
Elder-Beerman Stores(a) Department stores 191,700 2,216,531
Michaels Stores, Inc.(a) Arts & crafts stores 94,100 1,702,622
Pier 1 Imports, Inc. Housewares stores 184,000 1,782,500
Zale Corp.(a) Jewelry retailer 112,100 3,615,225
-------------
12,393,928
-------------
TOTAL CONSUMER DISCRETIONARY 37,863,906
</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>
CONSUMER STAPLES - 3.0%
CONSUMER STAPLES - 3.0%
International Home Foods, Inc.(a) Mfgr of shelf-staple foods 104,600 $ 1,765,125
International Multifoods Corp. Foodservice distribution 91,300 2,356,681
-------------
4,121,806
ENERGY - 2.1%
EXPLORATION & PRODUCTION - 2.1%
Newfield Exploration Co. Oil & gas producer 136,100 2,841,088
FINANCIAL SERVICES - 27.1%
BANKS/THRIFTS - 2.5%
Peoples Heritage Financial Group Maine-based thrift 165,400 3,308,000
INSURANCE - 15.5%
American Heritage Life Invest. Life insurance 86,400 2,111,400
CMAC Investment Corp. Mortgage insurance 93,200 4,281,375
CNA Surety Corp. Surety insurance 191,600 3,017,700
Enhance Financial Services Group Specialty reinsurance 145,600 4,368,000
Fremont General Corp. Workers' comp. insurance 133,800 3,311,550
HCC Insurance Holdings, Inc. P&C insurance 155,600 2,742,450
Horace Mann Educators Corp. P&C insurance 37,200 1,060,200
-------------
20,892,675
OTHER FINANCIAL SERVICES - 6.0%
American Capital Strategies, Ltd. Commercial finance 76,700 1,323,075
ARM Financial Group, Inc. Investment products 95,800 2,125,562
Heller Financial, Inc. Commercial finance 100,200 2,943,375
Raymond James Financial, Inc. Investment services 83,300 1,759,713
-------------
8,151,725
REAL ESTATE INVESTMENT TRUSTS - 3.1%
Parkway Properties, Inc. Office buildings REIT 72,000 2,250,000
Prentiss Properties Trust Office/industrial properties REIT 85,900 1,916,644
-------------
4,166,644
-------------
TOTAL FINANCIAL SERVICES 36,519,044
</TABLE>
10 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY NUMBER MARKET
DESCRIPTION OF SHARES VALUE
----------------------------------- --------- -------------
<S> <C> <C> <C>
HEALTH CARE - 11.9%
HEALTH CARE SERVICES - 2.3%
Trigon Healthcare, Inc.(a) Health maintenance organization 84,100 $ 3,137,981
MEDICAL EQUIPMENT/PRODUCTS - 9.6%
ADAC Laboratories(a) Medical imaging systems 123,000 2,456,156
Arrow International, Inc. Disposable catheters producer 86,300 2,707,663
DENTSPLY International Inc. Dental products manufacturer 131,300 3,380,975
Wesley Jessen VisionCare, Inc.(a) Contact lenses 157,000 4,356,750
-------------
12,901,544
-------------
TOTAL HEALTH CARE 16,039,525
MATERIALS & PROCESSING - 0.8%
BUILDING/CONSTRUCTION PRODUCTS - 0.8%
Interface, Inc. Carpet producer 121,200 1,124,888
PRODUCER DURABLES - 4.8%
AEROSPACE RELATED - 1.3%
TriStar Aerospace Co.(a) Distributes aerospace products 250,700 1,754,900
ELECTRICAL EQUIPMENT/PRODUCTS - 0.9%
General Cable Corp. Wire & cable producer 60,850 1,247,425
OTHER PRODUCER DURABLES - 2.6%
Pentair, Inc. Diversified manufacturer 87,900 3,499,519
-------------
TOTAL PRODUCER DURABLES 6,501,844
TECHNOLOGY - 15.2%
CONTRACT MANUFACTURING - 2.6%
DII Group, Inc.(a) Electronics manufacturing 153,800 3,537,400
DISTRIBUTION - 3.4%
Anixter International Inc.(a) Networking products 224,500 4,560,156
ELECTRONIC COMPONENTS - 1.7%
Artesyn Technologies, Inc. Power supplies 161,200 2,256,800
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1998 11
<PAGE>
- - PORTFOLIO Holdings as of December 31, 1998 (continued)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY NUMBER MARKET
DESCRIPTION OF SHARES VALUE
----------------------------------- --------- -------------
<S> <C> <C> <C>
OTHER TECHNOLOGY - 7.5%
Black Box Corp.(a) Networking/communications 76,700 $ 2,905,012
CACI International Inc.(a) Technology services provider 105,300 1,776,937
Hypercom Corp.(a) Electronic payment systems 150,400 1,485,200
Learning Co., Inc. (The)(a) Children's software 68,100 1,766,344
National Data Corp. Health care information 45,300 2,205,544
-------------
10,139,037
-------------
TOTAL TECHNOLOGY 20,493,393
-------------
TOTAL COMMON STOCKS - 96.4%
(Cost $117,524,468) 130,022,344
MONEY MARKET INSTRUMENTS(b)
Yield 5.23% to 5.30%
due February 1999 to July 1999
Sara Lee Corp. 172,717
Pitney Bowes Credit Corp. 2,414,156
Wisconsin Corp. Credit Union 2,384,330
-------------
TOTAL MONEY MARKET INSTRUMENTS - 3.7%
(Cost: $4,971,203) 4,971,203
-------------
TOTAL INVESTMENTS - 100.1%
(Cost $122,495,671) 134,993,547
OTHER LIABILITIES LESS ASSETS - (0.1%) (91,967)
-------------
NET ASSETS - 100.0% $ 134,901,580
-------------
-------------
</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 for federal income tax purposes of $122,495,671 on
December 31, 1998, net unrealized appreciation was $12,497,876, consisting of
gross unrealized appreciation of $18,509,546 and gross unrealized depreciation
of $6,011,670.
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - STATEMENT of Assets & Liabilities as of December 31, 1998
- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost:
$122,495,671) $134,993,547
Receivable for:
Securities sold $ 924,604
Dividends and interest 122,699
Shares sold 347,612 1,394,915
----------
Organization costs, net of accumulated
amortization of $19,801 2,440
------------
Total assets 136,390,902
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $1,000,548
Shares redeemed 319,728
Comprehensive management fee 166,606
Organization costs 2,440 1,489,322
---------- ------------
Net assets applicable to shares
outstanding $134,901,580
------------
------------
Shares outstanding--no par value
(unlimited number of shares
authorized) 11,454,561
------------
------------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 11.78
------------
------------
ANALYSIS OF NET ASSETS
Paid-in capital $123,879,870
Undistributed net realized loss on
sales of investments (1,476,166)
Unrealized appreciation of investments 12,497,876
------------
Net assets applicable to shares
outstanding $134,901,580
------------
------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1998 13
<PAGE>
- - STATEMENT of Operations For the Year Ended December 31, 1998
- ------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 1,163,664
Interest 516,675
-----------
Total investment income 1,680,339
Expenses:
Comprehensive management fee 2,332,288
Fees to unaffiliated trustees 14,218
Amortization of organization costs 2,712
-----------
Total expenses 2,349,218
-----------
Net investment loss (668,879)
Net realized and unrealized loss on investments:
Net realized loss on sales of investments (1,476,166)
Net change in unrealized appreciation (7,833,754)
-----------
Net realized and unrealized loss on investments (9,309,920)
-----------
Net decrease in net assets resulting from
operations $(9,978,799)
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
14 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - STATEMENTS of Changes in Net Assets
- ---------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/98 12/31/97
------------- ------------
<S> <C> <C>
From operations:
Net investment loss $ (668,879) $ (394,072)
Net realized (loss) gain on sales of
investments (1,476,166) 22,856,580
Net change in unrealized appreciation (7,833,754) 7,533,967
------------- ------------
Net (decrease) increase in net assets
resulting from operations (9,978,799) 29,996,475
Distributions to shareholders from:
Net realized gains (1,234,409) (25,152,661)
Return of capital (112,960) --
------------- ------------
Decrease in net assets resulting from
distributions to shareholders (1,347,369) (25,152,661)
From share transactions:
Proceeds from shares sold 94,550,013 124,093,499
Reinvestments of capital gain
distributions 1,318,065 24,674,327
Payments for shares redeemed (115,327,102) (93,257,451)
------------- ------------
Net (decrease) increase in net assets
resulting from share transactions (19,459,024) 55,510,375
------------- ------------
Total (decrease) increase in net assets (30,785,192) 60,354,189
Net assets at beginning of year 165,686,772 105,332,583
------------- ------------
Net assets at end of year $ 134,901,580 $165,686,772
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1998 15
<PAGE>
- - FINANCIAL Highlights
- ---------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
<S> <C> <C> <C> <C> <C>
---------------------------------------------------
Net asset value at
beginning of year $ 12.75 $ 11.94 $ 11.29 $ 10.14 $ 10.79
-------- -------- -------- --------- ---------
Income from investment
operations
Net investment (loss)
income (0.06) (0.03) (0.02) 0.06 0.02
Net realized and
unrealized (loss) gain
on investments (0.79) 3.13 2.94 2.06 (0.19)
-------- -------- -------- --------- ---------
Total from investment
operations (0.85) 3.10 2.92 2.12 (0.17)
-------- -------- -------- --------- ---------
Less distributions from:
Dividends from net
investment income -- -- (0.01) (0.06) (0.02)
Dividends from net realized
gains on investments (0.11) (2.29) (2.26) (0.91) (0.46)
Dividends from return of
capital (0.01) -- -- -- --
-------- -------- -------- --------- ---------
Total distributions (0.12) (2.29) (2.27) (0.97) (0.48)
-------- -------- -------- --------- ---------
Net asset value at end of year $ 11.78 $ 12.75 $ 11.94 $ 11.29 $ 10.14
-------- -------- -------- --------- ---------
-------- -------- -------- --------- ---------
Total Return (6.66%) 26.21% 26.60% 20.95% (1.52%)
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.51% 1.51% 1.53% 1.52% 1.51%
Ratio of net investment
(loss) income to average
net assets (0.43%) (0.30%) (0.24%) 0.50% 0.22%
Portfolio turnover rate 106% 104% 145% 102% 82%
Net assets, end of year (in
thousands) $134,902 $165,687 $105,333 $ 89,203 $ 99,638
-------- -------- -------- --------- ---------
-------- -------- -------- --------- ---------
</TABLE>
Effective August 31, 1995, the Fund's Investment Adviser changed from Mesirow
Asset Management, Inc., to Skyline Asset Management, L.P.
See accompanying notes to financial statements.
16 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 Value Plus ("Fund").
1
SIGNIFICANT ACCOUNTING POLICIES
/ / SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
/ / SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed), and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of money market instrument
premium and discount. Realized gains and losses from security transactions are
reported on an identified cost basis.
/ / FUND SHARE VALUATION - Fund shares are sold on a continuous basis and
redeemed on a continuous basis at net asset value. Net asset value per share is
determined as of the close of regular session trading on the New York Stock
Exchange (normally 3:00 p.m. Central time) each day the Exchange is open for
trading. The net asset value per share is determined by dividing the value of
all securities and other assets, less liabilities, by the number of shares of
the Fund outstanding.
/ / FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund's policy to comply with the special provisions of the Internal Revenue
Code available to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income. Such provisions were complied
with and, therefore, no federal income taxes have been accrued.
As of December 31, 1998, the Fund had capital loss carryforwards of $1,476,166.
This loss may be used to offset future gains arising in tax years through 2006.
ANNUAL REPORT - DECEMBER 31, 1998 17
<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 $2,332,288.
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, fees of $15,556 were paid by the Fund to
the unaffiliated trustees.
3
SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statements of changes in net assets
were as follows:
<TABLE>
<CAPTION>
Year Ended Year ended
12/31/98 12/31/97
------------------------
<S> <C> <C>
Shares sold 7,559,639 9,132,124
Shares issued in reinvestment of dividends 113,150 1,959,834
----------- -----------
7,672,789 11,091,958
Less shares redeemed (9,216,532) (6,913,355)
----------- -----------
Net (decrease) increase in shares outstanding (1,543,743) 4,178,603
----------- -----------
----------- -----------
</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 $ 153,606,350
Proceeds from sales 170,675,964
</TABLE>
18 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - REPORT of Independent Auditors
- ---------------------------------------------
To the Shareholders of Skyline Small Cap Value Plus
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 Value Plus (formerly Skyline
Special Equities II) 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 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, 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 Value Plus 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 each of the five
years in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 25, 1999
ANNUAL REPORT - DECEMBER 31, 1998 19
<PAGE>
- - FEDERAL Tax Status of 1998 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. Distributions as a return of capital are not taxable, but reduce
the cost basis of shares held.
- - 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 7,459,189
Against 119,927
Abstain 118,318
Total 7,697,434
</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.
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
