<PAGE>
ANNUAL REPORT -- December 31, 1998
SKYLINE SPECIAL
EQUITIES PORTFOLIO
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
SKYLINE FUNDS
<PAGE>
- - LETTER from William M. Dutton, Portfolio Manager:(1)
- ---------------------------------------------
December 31, 1998
Dear Shareholder:
OVERVIEW
The Fund showed a gain of 10.97% in the 4th quarter, as the stock market moved
up strongly from its depressed level in September. For the year, the Fund showed
a loss of 7.17% due to its decline in the second and third quarters of 1998. The
Russell 2000 Index delivered a gain of 16.31% for the 4th quarter and showed a
loss of 2.55% for the year. The Fund lagged the Index primarily because of its
sector weightings, which were tilted toward economically sensitive stocks, a
group that performed poorly for both the quarter and the year. While it is
disappointing to trail the Index, we are very proud of our long-term consistent
performance record. The Fund has trailed the Russell 2000 Index in only two of
its 12 years of operation.
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
ANNUAL REPORT - DECEMBER 31, 1998 1
<PAGE>
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, 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 somewhat over the past
year. In general, a slowdown in economic growth causes problems for
value-oriented investors.
PORTFOLIO REVIEW
The Fund showed a gain of 10.97% in the 4th quarter compared to a gain of 16.31%
for the Russell 2000 Index. For the year, the Fund showed a loss of 7.17%
compared to a loss of 2.55% for the Russell 2000 Index. The Fund lagged the
Index primarily because its value-oriented investment style led to heavily
weighted positions in economically sensitive industries, which were hurt by the
slowdown in the economy, and low weightings in technology and utilities, the two
top performing sectors in the market for the year. Also, stock selection was not
as strong as usual, as the Fund had too many stocks show significant declines.
In terms of sector performance, results were quite mixed for both the fourth
quarter and the year. The consumer and financial sectors, which made up 40%-50%
of the Fund for most of the year, generally performed well, showing nice gains
for both periods. On the other hand, economically sensitive sectors, which made
up about 30%-35% of the Fund, showed sub-par returns for the quarter and
negative returns for the year. The energy sector was a problem all year,
although it did not significantly hurt the Fund because of its low weighting.
In terms of individual stock selection, the Fund had too many stocks show
significant declines during the year. Most of the major stock setbacks occurred
in sectors where there were major fundamental problems such as the energy,
industrial, and technology areas. Certain individual stocks in these sectors
were severely hurt by Asian related problems.
OUTLOOK
Our outlook for the Fund is extremely positive, particularly over the next three
to five years. The most positive factor is the attractive relative valuation of
the Fund. On a P/E multiple basis, the Fund trades at an approximate 30%
discount to the Russell 2000 Index and a 44% discount to the S&P 500 Index. The
Fund has never traded at such a large discount to the S&P 500 Index. The P/E of
the Fund is approximately 14 times trailing 12-month earnings, which is
extremely inexpensive in a 5% interest rate environment.
2 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
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 an environment where most companies show improving
earnings. Also, it would likely improve investor confidence, a necessary
condition in order to improve the valuation of small cap stocks.
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, the Fund will almost certainly decline also. However, we are extremely
optimistic about performance over the long term since the valuation of the Fund
today is so compelling relative to both large cap stocks and current interest
rates.
/s/ WILLIAM M. DUTTON
- - PORTFOLIO Characteristics(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
SPECIAL
EQUITIES RUSSELL 2000 S&P 500
<S> <C> <C> <C>
P/E RATIO (MEDIAN) 13.8 20.0 24.6
PRICE/BOOK 1.95 2.53 4.87
PRICE/SALES 0.67 1.30 2.02
- ---------------------------------------------------------------------------------------------
EPS GROWTH--5 YRS (HISTORICAL) 15.7% 16.6% 17.2%
EPS GROWTH--1 YR (FORECASTED) 15.7% 18.6% 12.2%
- ---------------------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $460 million $750 million $60 billion
PORTFOLIO VALUE $445 million $855 billion $9,907 billion
NUMBER OF HOLDINGS 84 1,932 500
--------------------------------------------------------------------------------
TICKER SYMBOL: SKSEX
CUSIP #: 830833208
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
NET ASSET VALUE (PER SHARE): $19.78
1998 DISTRIBUTIONS (PER SHARE):
LONG-TERM CAPITAL GAIN $0.21
SHORT-TERM CAPITAL GAIN $0.11
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1998 3
<PAGE>
- - PERFORMANCE (%)(1)
- -------------------------------------------------
<TABLE>
<CAPTION>
4Q 3
1998 1998 YRS.
<S> <C> <C> <C>
SPECIAL EQUITIES 10.97 -7.17 17.90
RUSSELL 2000 16.31 -2.55 11.58
S&P 500 21.31 28.76 28.40
</TABLE>
<TABLE>
<CAPTION>
CALENDAR YEARS
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SPECIAL EQUITIES -7.2 35.4 30.4 13.8 -1.2
RUSSELL 2000 -2.6 22.4 16.5 28.4 -1.8
S&P 500 28.8 33.4 23.3 37.5 1.3
</TABLE>
- - SECTOR Weightings (as of December 31, 1998)
- ------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Autos & Transportation 10.8%
Consumer Discretionary 29.5%
Consumer Staples 1.5%
Energy 2.1%
Financial Services 16.4%
Health Care 2.1%
Materials & Processing 13.9%
Producer Durables 10.0%
Technology 6.5%
Cash 7.2%
</TABLE>
4 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5 10 SINCE
YRS. YRS. INCEPTION(2)
<S> <C> <C> <C>
SPECIAL EQUITIES 13.02 18.26 16.17
RUSSELL 2000 11.86 12.92 10.41
S&P 500 24.15 19.22 16.47
</TABLE>
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987(2)
<S> <C> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES 22.9 42.5 47.4 -9.3 24.0 29.7 -16.9
RUSSELL 2000 18.9 18.4 46.1 -19.5 16.2 24.9 -24.3
S&P 500 10.0 7.7 30.6 -3.2 31.4 16.5 -12.0
</TABLE>
- - SECTOR Performance (as of December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q 1998 YTD 1998
------------------------------------------------------- -------------------------------------------------------
SPECIAL RUSSELL SPECIAL RUSSELL
EQUITIES 2000 EQUITIES 2000
<S> <C> <C> <C> <C> <C>
Consumer Staples 58.1% 14.8% Health Care 42.2% 3.3%
Technology 36.9 32.9 Consumer Staples 18.1 1.3
Autos & Transportation 18.5 23.9 Financial Services 12.1 -7.2
Producer Durables 11.9 19.9 Consumer Discretionary 8.1 3.8
Financial Services 9.5 6.3 Autos & Transportation - 6.1 1.1
Consumer Discretionary 9.2 21.4 Technology -14.1 12.8
Materials & Processing 8.3 10.2 Materials & Processing -26.2 -12.3
Health Care 0.0 27.0 Producer Durables -27.9 -7.2
Energy -16.8 -15.5 Energy -62.0 - 49.6
Other N/A* 14.8 Other N/A* -16.0
Utilities N/A* 12.5 Utilities N/A* 12.1
</TABLE>
* Not Applicable
ANNUAL REPORT - DECEMBER 31, 1998 5
<PAGE>
- - TOP Ten Holdings(3)
<TABLE>
<CAPTION>
% OF NET ASSETS
- -----------------------------------------------------------------------------
<S> <C>
DELPHI FINANCIAL GROUP, INC.
Accident & health insurance 2.8%
NEW ENGLAND BUSINESS
Business forms 2.7%
INTERPOOL, INC.
Container leasing firm 2.5%
LANDSTAR SYSTEM, INC.
Truckload carrier 2.2%
WORLD COLOR PRESS, INC.
Commercial printer 2.0%
HELLER FINANCIAL, INC.
Commercial finance 2.0%
IHOP CORP.
Casual dining 1.9%
ZALE CORP.
Jewelry retailer 1.8%
BLACK BOX CORP.
Networking/communication products 1.8%
CITATION CORP.
Castings manufacturer 1.8%
TOP TEN HOLDINGS 21.5%
</TABLE>
- - STOCK Highlights(3)
- ---------------------------------------------
RAYMOND JAMES FINANCIAL, INC. (RJF)
RJF is a full service broker-dealer engaged in most aspects of securities
distribution and investment banking. RJF generates superior earnings growth
through its ability to consistently grow its sales force at an above average
rate. Financial advisors are attracted to RJF because unlike the major Wall
Street firms, at RJF, advisors can operate as independent contractors. By
operating independently, advisors have full control over the management of their
business and the opportunity to earn more if they generate sales and control
costs. Advisors are also attracted to RJF's broad range of products and high
service levels. Priced at 12x last 12 months' earnings per share, RJF is an
inexpensive stock.
THE STANDARD REGISTER COMPANY (SR)
SR designs, manufactures, and sells business forms and provides short-run
printing services to businesses. SR is expected to show above average earnings
growth through the consolidation of UARCO, an acquisition that increased company
sales by nearly 50%. This acquisition enhances SR's market position and provides
significant opportunities to achieve economies of scale. SR will also benefit
from the introduction of new products such as electronic forms and continued
geographic expansion of its quick-print operations. SR is an inexpensive stock
trading at a multiple of only 11 times estimated earnings for the 1999 year.
6 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - 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>
SPECIAL RUSSELL S&P
EQUITIES PORTFOLIO 2000 500
<S> <C> <C> <C>
Initial Investment $10,000 $10,000 $10,000
1987 $8,314 $7,567 $8,794
1988 $10,787 $9,449 $10,247
1989 $13,377 $10,986 $13,469
1990 $12,135 $8,843 $13,037
1991 $17,885 $12,914 $17,018
1992 $25,470 $15,294 $18,325
1993 $31,289 $18,184 $20,158
1994 $30,929 $17,582 $20,424
1995 $35,206 $22,932 $28,087
1996 $45,897 $26,715 $34,617
1997 $62,161 $32,663 $46,172
1998 $57,703 $31,849 $59,513
</TABLE>
Note: Past performance is no guarantee of future results. See "Notes to
Performance" below.
NOTES TO PERFORMANCE
(1) The performance for the one, three, five, and ten years ended December 31,
1998, and for the period April 23, 1987 (inception) through December 31,
1998, is an average annual 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 April 23, 1987.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor Inc.
ANNUAL REPORT - DECEMBER 31, 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 - 10.8%
AUTO RELATED - 2.8%
Aftermarket Technology(a) Auto drive train products 325,600 $ 2,564,100
Delco Remy International, Inc.(a) Starters & alternators 370,400 3,634,550
Intermet Corp. Metal castings 470,100 6,140,681
-------------
12,339,331
OTHER TRANSPORTATION - 4.6%
Interpool, Inc. Container leasing firm 669,900 11,220,825
Kitty Hawk, Inc.(a) Air freight services 310,900 3,419,900
Monaco Coach Corp.(a) RV producer 198,900 5,270,850
Trailer Bridge, Inc.(a) Marine transportation 316,800 485,100
-------------
20,396,675
TRUCKING - 3.4%
Landstar System, Inc.(a) Truckload carrier 242,000 9,861,500
U.S. Xpress Enterprises, Inc.(a) Truckload carrier 367,000 5,505,000
-------------
15,366,500
-------------
TOTAL AUTOS & TRANSPORTATION 48,102,506
CONSUMER DISCRETIONARY - 29.5%
APPAREL/TEXTILES - 1.6%
Gerber Childrenswear, Inc.(a) Infant/toddler apparel 220,500 1,915,594
Kellwood Co. Apparel manufacturer 208,200 5,205,000
-------------
7,120,594
COMMERCIAL SERVICES - 6.6%
Borg-Warner Security(a) Security services 280,700 5,263,125
Daisytek International Corp.(a) Computer supplies 272,900 5,185,100
New England Business Business forms 303,800 11,886,175
Standard Register Co. (The) Business forms 237,700 7,353,844
-------------
29,688,244
CONSUMER PRODUCTS/SERVICES - 1.3%
Gibson Greetings, Inc.(a) Greeting cards 243,600 2,892,750
Maxwell Shoe Co. Inc.(a) Footwear company 264,200 2,889,687
-------------
5,782,437
PRINTING/PUBLISHING - 4.0%
Banta Corp. Commercial printer 226,200 6,192,225
Cadmus Communications Corp. Commercial printer 135,900 2,565,113
World Color Press, Inc.(a) Commercial printer 297,100 9,042,981
-------------
17,800,319
RESTAURANTS - 6.0%
CEC Entertainment, Inc.(a) Children-oriented casual dining 205,100 5,691,525
IHOP Corp.(a) Casual dining 212,100 8,470,744
O'Charley's Inc.(a) Casual dining 385,150 5,440,244
Ryan's Family Steak Houses(a) Casual dining 381,500 4,721,062
Sonic Corp.(a) Fast-food restaurants 90,900 2,261,138
-------------
26,584,713
</TABLE>
8 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY NUMBER MARKET
DESCRIPTION OF SHARES VALUE
----------------------------------- --------- -------------
<S> <C> <C> <C>
RETAIL - 10.0%
Ames Department Stores, Inc.(a) Major discount retail chain 179,300 $ 4,841,100
Discount Auto Parts, Inc.(a) Auto parts stores 335,200 7,353,450
Fingerhut Companies, Inc. Catalog retailer 54,600 842,888
Finlay Enterprises, Inc.(a) Leased jewelry departments 227,100 2,299,388
Jo-Ann Stores, Inc.(a) Fabric/craft stores 219,900 3,545,887
MarineMax, Inc.(a) Recreational boats 289,700 2,281,387
Michaels Stores, Inc.(a) Arts & crafts stores 107,300 1,941,459
Pier 1 Imports, Inc. Housewares stores 527,100 5,106,281
Stein Mart, Inc.(a) Off-price apparel chain 258,600 1,802,119
Tractor Supply Co.(a) Farm-related products 254,300 6,103,200
Zale Corp.(a) Jewelry retailer 253,500 8,175,375
-------------
44,292,534
-------------
TOTAL CONSUMER DISCRETIONARY 131,268,841
CONSUMER STAPLES - 1.5%
CONSUMER STAPLES - 1.5%
International Multifoods Corp. Foodservice distribution 259,700 6,703,506
ENERGY - 2.1%
EXPLORATION & PRODUCTION - 0.5%
Miller Exploration Co.(a) Oil & gas producer 446,100 2,007,450
OTHER ENERGY - 1.6%
Cal Dive International, Inc.(a) Oil services company 135,300 2,807,475
MarkWest Hydrocarbon, Inc.(a) Natural gas processing 272,300 2,450,700
Willbros Group, Inc.(a) Engineering/construction firm 322,600 1,794,463
-------------
7,052,638
-------------
TOTAL ENERGY 9,060,088
FINANCIAL SERVICES - 16.4%
INSURANCE - 12.3%
American Heritage Life Invest. Life insurance 289,700 7,079,544
Chartwell Re Corporation P&C reinsurance 157,600 3,743,000
CNA Surety Corp. Surety insurance 351,900 5,542,425
Delphi Financial Group, Inc.(a) Accident & health insurance 239,249 12,545,619
Financial Security Assurance
Holdings Municipal bond insurance 140,800 7,638,400
Fremont General Corp. Workers' comp. insurance 300,200 7,429,950
Horace Mann Educators Corp. P&C insurance 177,200 5,050,200
SCPIE Holdings Inc. Medical malpractice insurance 182,600 5,535,063
-------------
54,564,201
</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>
OTHER FINANCIAL SERVICES - 4.1%
ARM Financial Group, Inc. Investment products 208,900 $ 4,634,969
Heller Financial, Inc. Commercial finance 298,000 8,753,750
Raymond James Financial, Inc. Investment services 237,300 5,012,962
-------------
18,401,681
-------------
TOTAL FINANCIAL SERVICES 72,965,882
HEALTH CARE - 2.1%
HEALTH CARE SERVICES - 2.1%
AmeriPath, Inc.(a) Physician practice mgt. 334,900 2,993,169
Trigon Healthcare, Inc.(a) Health maintenance org. 174,400 6,507,300
-------------
9,500,469
MATERIALS & PROCESSING - 13.9%
BUILDING/CONSTRUCTION PRODUCTS - 5.3%
American Homestar Corp.(a) Manufactured housing 224,000 3,360,000
Barnett Inc.(a) Hardware products 91,100 1,252,625
Chicago Bridge & Iron Co. Maker of steel tanks 478,800 5,895,225
Dayton Superior Corp.(a) Concrete accessories 270,300 5,203,275
Interface, Inc. Carpet producer 393,700 3,654,028
Nortek, Inc.(a) Building products 160,700 4,439,338
-------------
23,804,491
INDUSTRIAL PRODUCTS - 2.7%
Furon Company Polymer-based products 459,900 7,847,044
Lydall, Inc.(a) Specialty filtration products 345,700 4,105,187
-------------
11,952,231
METAL FABRICATIONS - 1.8%
Citation Corp.(a) Castings manufacturer 622,400 7,857,800
PACKAGING/PAPER - 3.0%
Albany International Corp.(a) Paper machine clothing 238,816 4,522,572
BWAY Corp.(a) Metal cans/containers 273,600 4,121,100
Chesapeake Corp. Specialty paper/packaging 57,600 2,124,000
FiberMark, Inc.(a) Fiber-based materials 184,300 2,511,087
-------------
13,278,759
SPECIALTY CHEMICALS - 1.1%
Fuller Company (H.B.) Adhesives and coatings 104,100 5,009,812
-------------
TOTAL MATERIALS & PROCESSING 61,903,093
PRODUCER DURABLES - 10.0%
ELECTRICAL EQUIPMENT/PRODUCTS - 3.1%
Belden Inc. Wire & cable manufacturer 96,600 2,046,713
General Cable Corp. Wire & cable producer 301,000 6,170,500
MagneTek, Inc.(a) Lighting, ballasts, motors 496,900 5,745,406
-------------
13,962,619
</TABLE>
10 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY NUMBER MARKET
DESCRIPTION OF SHARES VALUE
----------------------------------- --------- -------------
<S> <C> <C> <C>
MACHINERY - 2.5%
DT Industries, Inc. Packaging equipment 303,200 $ 4,775,400
National Equipment Services,
Inc.(a) Equipment rental 271,300 3,119,950
SunSource Inc. Conglomerate 167,200 3,145,450
-------------
11,040,800
OTHER PRODUCER DURABLES - 4.4%
EG&G, Inc. Conglomerate 226,900 6,310,656
IDEX Corp. Specialty pump products 194,300 4,760,350
LSI Industries Inc. Lighting/graphics products 228,000 5,115,750
Tokheim Corp.(a) Gas station pumps/eqpt 341,900 3,333,525
-------------
19,520,281
-------------
TOTAL PRODUCER DURABLES 44,523,700
TECHNOLOGY - 6.5%
ELECTRONIC COMPONENTS - 1.0%
Dallas Semiconductor Corp. Electronic components 107,400 4,376,550
OTHER TECHNOLOGY - 5.5%
Black Box Corp.(a) Networking/communications 210,200 7,961,325
Imation Corp.(a) Data storage products 321,400 5,624,500
National Data Corp. Health care information 111,100 5,409,181
PSC Inc.(a) Bar coding equipment 307,900 2,925,050
Richardson Electronics, Ltd. Distributes electronic components 269,700 2,595,863
-------------
24,515,919
-------------
TOTAL TECHNOLOGY 28,892,469
-------------
TOTAL COMMON STOCKS - 92.8%
(Cost $397,600,587) 412,920,554
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1998 11
<PAGE>
- - PORTFOLIO Holdings as of December 31, 1998 (continued)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
-------------
<S> <C> <C> <C>
MONEY MARKET INSTRUMENTS(b)
Yield 5.23% to 5.30%
due February 1999 to July 1999
American Family Financial Services $ 206,000
General Mills, Inc. 11,448,384
Pitney Bowes Credit Corp. 9,943,257
Sara Lee Corp. 3,724,305
Warner Lambert Corp. 506,000
Wisconsin Corp. Credit Union 1,994,000
Wisconsin Electric Power Corp. 954,343
-------------
TOTAL MONEY MARKET INSTRUMENTS - 6.5%
(Cost: $28,776,289) 28,776,289
-------------
TOTAL INVESTMENTS - 99.3%
(Cost $426,376,876) 441,696,843
OTHER ASSETS LESS LIABILITIES - 0.7% 3,326,779
-------------
NET ASSETS - 100.0% $ 445,023,622
-------------
-------------
</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 $426,376,876 on
December 31, 1998, net unrealized appreciation was $15,319,967, consisting of
gross unrealized appreciation of $66,743,622 and gross unrealized depreciation
of $51,423,655.
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:
$426,376,876) $441,696,843
Receivable for:
Securities sold $5,281,891
Dividends and interest 286,529
Shares sold 871,206 6,439,626
---------- ------------
Total assets 448,136,469
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 989,242
Shares redeemed 1,587,818
Comprehensive management fee 535,787 3,112,847
---------- ------------
Net assets applicable to shares
outstanding $445,023,622
------------
------------
Shares outstanding--no par value
(unlimited number of shares
authorized) 22,496,196
------------
------------
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 19.78
------------
------------
ANALYSIS OF NET ASSETS
Paid-in capital $412,672,188
Undistributed net realized gain on sales
of investments 17,031,467
Unrealized appreciation of investments 15,319,967
------------
Net assets applicable to shares
outstanding $445,023,622
------------
------------
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1998 13
<PAGE>
- - STATEMENT of Operations Year Ended December 31, 1998
- ------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 2,825,172
Interest 1,854,780
------------
Total investment income 4,679,952
Expenses:
Comprehensive management fee 7,049,303
Fees to unaffilliated trustees 22,482
------------
Total expenses 7,071,785
------------
Net investment loss (2,391,833)
Net realized and unrealized gain (loss) on
investments:
Net realized gain on sales of investments 23,823,435
Net change in unrealized appreciation (58,687,760)
------------
Net realized and unrealized loss on investments (34,864,325)
------------
Net decrease in net assets resulting from
operations $(37,256,158)
------------
------------
</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 $ (2,391,833) $ (1,451,263)
Net realized gain on sales of
investments 23,823,435 54,539,741
Net change in unrealized appreciation (58,687,760) 45,751,321
------------- ------------
Net (decrease) increase in net assets
resulting from operations (37,256,158) 98,839,799
Distributions to shareholders from net
realized gains (7,028,589) (54,133,704)
From share transactions:
Proceeds from shares sold 144,759,773 210,895,971
Reinvestment of capital gain
distribution 6,858,335 52,981,301
Payments for shares redeemed (129,379,429) (60,994,053)
------------- ------------
Net increase in net assets resulting
from share transactions 22,238,679 202,883,219
------------- ------------
Total (decrease) increase in net assets (22,046,068) 247,589,314
Net assets at beginning year 467,069,690 219,480,376
------------- ------------
Net assets at end of year $ 445,023,622 $467,069,690
------------- ------------
------------- ------------
</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 $ 21.66 $ 18.16 $ 16.79 $ 15.64 $ 17.83
-------- -------- -------- -------- --------
Income from Investment
Operations
Net investment loss (0.11) (0.07) (0.04) (0.06) (0.08)
Net realized and
unrealized (loss)
gain on investments (1.45) 6.46 5.02 2.21 (0.18)
-------- -------- -------- -------- --------
Total from
investment
operations (1.56) 6.39 4.98 2.15 (0.26)
-------- -------- -------- -------- --------
Less distributions from
net realized gains on
investments (0.32) (2.89) (3.61) (1.00) (1.93)
-------- -------- -------- -------- --------
Net asset value at end of
year $ 19.78 $ 21.66 $ 18.16 $ 16.79 $ 15.64
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return (7.17%) 35.43% 30.37% 13.83% (1.15%)
Ratios/Supplemental Data
Ratio of expenses to
average net assets 1.47% 1.48% 1.51% 1.51% 1.49%
Ratio of net investment
loss to average net
assets (0.50%) (0.41%) (0.32%) (0.35%) (0.49%)
Portfolio turnover rate 68% 62% 130% 71% 82%
Net assets, end of year
(in thousands) $445,024 $467,070 $219,480 $174,899 $202,771
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</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
Special Equities Portfolio ("Fund"). Skyline Special Equities Portfolio closed
to new investors on January 30, 1997.
1
SIGNIFICANT ACCOUNTING POLICIES
/ / SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by a pricing
service. Variable rate demand notes are valued at cost which equals market
value. Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
/ / SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis and includes amortization of premium and discount on money
market instruments. Realized gains and losses from security transactions are
reported on an identified cost basis.
/ / FUND SHARE VALUATION - Fund shares are sold and redeemed on a continuous
basis at net asset value. Net asset value per share is determined as of the
close of regular session trading on the New York Stock Exchange (normally 3:00
p.m. Central time), each day the Exchange is open for trading. The net asset
value per share is determined by dividing the value of all securities and other
assets, less liabilities, by the number of shares of the Fund outstanding.
/ / FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS TO SHAREHOLDERS - It is
the Fund's policy to comply with the special provisions of the Internal Revenue
Code available to regulated investment companies and, in the manner provided
therein, to distribute all of its taxable income. Such provisions were complied
with and, therefore, no federal income taxes have been accrued.
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.
ANNUAL REPORT - DECEMBER 31, 1998 17
<PAGE>
- -NOTES to Financial Statements (continued)
- ------------------------------------------------------------------------
/ / 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 $7,049,303.
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 $22,971 to its
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 6,883,008 9,851,723
Shares issued for reinvestment of dividends 354,028 2,483,873
----------- -----------
7,237,036 12,335,596
Less shares redeemed (6,307,941) (2,855,781)
----------- -----------
Net increase in shares outstanding 929,095 9,479,815
----------- -----------
----------- -----------
</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 $ 312,797,833
Proceeds from sales 306,668,148
</TABLE>
18 ANNUAL REPORT - DECEMBER 31, 1998
<PAGE>
- - REPORT of Independent Auditors
- ---------------------------------------------
To the Shareholders of Skyline Special Equities Portfolio
and the Board of Trustees of Skyline Funds
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Special Equities Portfolio as of
December 31, 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 Special Equities Portfolio 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.
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.
- - 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 15,341,035
Against 181,906
Abstain 146,696
Total 15,669,637
</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
